The Downside of Reverse Mortgages

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Getting Paid for Your Home? Where’s the Downside?

The use of reverse mortgages to supplement retirement income is increasing. But, can it be too good to be true? A reverse mortgage is a loan issued by a lender using the equity of a home as the collateral. There are some specific guidelines to be met, but simply stated, this is a loan (a mortgage) which is paid in a variety of different methods. This allows the homeowner to keep full title/deed to the property until very specific conditions are met and produces an increase in monthly income.

The Specific Disadvantages of a Reverse Mortgage

The disadvantages of a reverse mortgage are as follows:

·       It is a mortgage, so all of the inspections, title issues, time lines, and closing costs must be incurred
·       Payments of loan disbursements can affect some need-based programs/services
·       Lump sum distributions may affect capital gains
·       Property taxes, insurance, and general upkeep must be continued
·       HUD standards must be followed for repairs and changes to the property or buildings
·       To keep the property, the loan must be paid back by the owners or their heirs.

The Public Perception

Being touted as the next great thing in mortgages, the borrower needs to be aware of some of the particulars. This is not free money for a home. To qualify for a reverse mortgage, both the borrower and the property must qualify.

The Borrower’s Qualifications

To qualify for a reverse mortgage, the homeowner/borrower must:

·       Participate in a consumer education session with a HUD-approved counselor (family member participation is welcome)
·       Be age 62 or older
·       Have the property as their main residence
·       Hold a fair and clear title to the property, or
·       Have a balance on the current mortgage that can/will be paid off with a reverse mortgage

The Property’s Qualifications

The property must also qualify. As such, the property:

·       Must be a single-family dwelling or one-to-four unit, owner-occupied dwelling
·       Can be a townhome, detached home, condominium unit, planned unit development (PUDs) or a manufactured home
·       Must meet HUD (Department of Housing and Urban Development) minimum property standards

How a Reverse Mortgage Differs from a Home-Equity Loan

A reverse mortgage differs from a traditional home equity loan in that there are no payments made on the loan until such time as both parties pass away, move away, or sell the property. At that time, the loan is either paid off or the property becomes the possession of the lender. As a mortgage, all of the proceedings, legalities, and costs associated with getting a mortgage are assumed. However, as there is no real division between a buyer and a seller, the borrower assumes both positions and the costs. These costs can sometimes be incorporated into the loan.

The Methods of Payments

Although the IRS does not consider these payments a form of income, there may be some other instances where payment type may be disadvantageous to the borrower..
The methods of payment and their disadvantages are as follows:

·         Lump sum: a specific amount is paid immediately; this can sometimes affect the capital gains in the borrowers’ portfolio or lead to mismanagement of the funds.
·         Term: funds are released in set monthly amounts for a specific period as requested by the customers; these can be limited and not enough to meet the borrower’s needs.
·         Tenure: loan proceeds are distributed in equal monthly allotments for as long as at least one homeowner continues to occupy the home as their primary residence. Depending on the health of the borrower(s), this could be a short time, possibly resulting in the estate having to come up with a larger loan payoff.
·         Line of Credit: funds remain available for the customer to draw as needed. Depending on the location of the lender, this may not be convenient if the borrower suspects s/he may need to get at funds on short notice.
·         Combination: Any of the above with the same disadvantages. Reverse mortgages can be a good thing, if precautions are taken and the borrowers educate themselves on the process.

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