You’ve heard the commercials. Reverse mortgage lenders claim that you’re literally living in a gold mine of cash, and you can tap into it to help fund your retirement or pay off debt. The best part yet? You won’t ever need to make a payment for as long as you live, and you get to keep living in your home. Yet it’s not all sunshine and rainbows. What are the downsides of a reverse mortgage you may ask?
As with most promises, the truth isn’t as black-and-white as it seems. Most importantly, it is possible to lose your home if you’re not careful. In fact, the Consumer Financial Protection Bureau even heavily fined some reverse mortgage lenders in 2016 for these deceptive claims.
Reverse mortgages aren’t all bad. But it’s important to understand what is the downside of a reverse mortgage. That way you can avoid these pitfalls, or maybe even decide that a reverse mortgage isn’t a good fit for you.
You’ll Have to Agree to Certain Ongoing Requirements
When you sign up for a reverse mortgage, you’re agreeing to three things:
- You’ll buy homeowners insurance
- You won’t fall behind on your property taxes
- You’ll keep up with home maintenance and repairs
Those three things can be very expensive, especially if property taxes rise in your area or if you need to make a large repair, such as replacing a roof.
If you can’t do those things, your reverse mortgage will immediately become due. If you can’t pay it (which most people can’t), you’ll have to move out of your home so you can sell it to pay off the balance. This is one of the main ways that people end up losing their homes with reverse mortgages, and it’s one of the main things financial experts caution about when discussing what is the downside of a reverse mortgage.
Your Reverse Mortgage Balance Can Increase Quickly
Reverse mortgages are already one of the more expensive loan products available.
But what makes them even more costly is the fact that your reverse mortgage balance grows over time. As interest charges pile up, your outstanding balance grows ever faster.
So while it’s true that you won’t need to make payments on the reverse mortgage if you don’t want, that cost still has to be paid at some point. When that time comes, it’ll likely be a bigger bill than with other financing methods.
One saving grace here is that at least with Home Equity Conversion Loans (HECMs; the most common type of reverse mortgage), the balance due on the loan will never be more than what your home is worth if you sell it for its fair market price. There’s no such requirement with proprietary mortgages and it may be possible to become upside-down on your reverse mortgage if that’s what’s written into your contract.
You Can Outlive Your Reverse Mortgage
Reverse mortgages can be paid out in several ways, such as in a lump sum, in steady payments over time, or as a line of credit to draw on as you need. The money from a reverse mortgage can last you a long time, but it may not last forever.
Your chances of outliving your reverse mortgage increase if you:
- Live a long time
- Take out the reverse mortgage when you’re younger
- Take out a lump sum and don’t manage your money as well
This is an especially important point to consider. If you tap out your reverse mortgage down the road, not only will you be out of a source of income, but you’ll likely be less able to work at that point and your healthcare expenses may be higher. And again, if you can’t afford the ongoing requirements of the reverse mortgage, you could lose your house.
Reverse Mortgages Can Complicate Things for Your Spouse If They’re Not On the Loan
Sometimes people don’t take out a reverse mortgage with their spouse. This can happen, for example, if their spouse isn’t old enough for a reverse mortgage yet (you need to be at least 62 years old), or if they get married later on in life.
Regardless, if your spouse isn’t a co-borrower and you pass away first, things will become more difficult for your surviving spouse.
First, if you’re still receiving payments from your reverse mortgage, these will now stop. Your spouse will need to make do with what they already have saved or find other sources of income.
If you took out a HECM reverse mortgage after August 4, 2014, your spouse may be allowed to continue living in your home if they meet certain initial requirements and if they continue to meet the ongoing obligations. They will not need to make any payments on the loan.
For HECMs taken out before this date, or for proprietary reverse mortgages, there is no requirement that your spouse be allowed to stay in the home. Depending on the terms of your reverse mortgage, they may be kicked out so that the home can be sold to pay off the loan.
It May Be Difficult or Impossible to Leave Your Home to Your Heirs
If you and your spouse pass away, your heirs get the first crack at the home. With HECMs, they’ll get six months to decide what to do.
If your heirs want to keep the home, they’ll need to pay off the outstanding balance of the reverse mortgage. This usually means they’ll have to take out a regular mortgage of their own.
Another saving grace of HECMs is that if the reverse mortgage balance is higher than your home is actually worth, your heirs don’t necessarily have to pay for the entire house. They’ll only need to pay 95% of the home’s value in order to pay the loan off. This means they effectively get a 5% discount on the home.
If your heirs aren’t able to pay off the loan, either because they aren’t able to qualify for a mortgage of their own or if they don’t have enough money in cash, then they’ll need to sell the house. It might be a cherished family home that you’ve had for decades or even generations, but one way or another, that loan must now be repaid. If your heirs want to keep it but they can’t afford to pay off the loan themselves, the home will be sold and lost from your family.
Reverse Mortgages Are Not Your Only Option
Reverse mortgages can make sense in some situations, but there’s a reason people caution against them. As you can see, they have a number of downsides.
If you’re looking for a way to fund retirement or pay off debt, a reverse mortgage is not your only choice. Home Equity Lines of Credit (HELOCs) are another way to tap into the equity in your home, as is a Home Equity Investment (HEI) from Point.
Home Equity Investments are not debt products. Instead, Point invests in your home’s future appreciation by giving you cash today that must be repaid later, when your home is worth more. An HEI won’t put you into debt, and you won’t have to make any payments in the interim.
A Point Home Equity Investment has the advantage that the amount you’ll have to pay back depends on how much your home’s value rises over time. Your heirs can also easily take over the HEI if you pass away so that you can rest assured your home can stay in the family for as long as they want it.