Dangers of Reverse Mortgages

There are dangers of reverse mortgages borrowers should be aware of prior to determining if this type of home loan is right for them. A reverse mortgage pays a set amount of money each month to the homeowner. These loans, which are for seniors, continue payout until the homeowner's death. At that time, the home is sold and the reverse mortgage lender owns the home.

Learn about Different Types of Home Loans.

There are many potential dangers associated with reverse mortgages. The best way to avoid any problems to have a solid understanding of the loan documentation. Speak with an attorney or certified housing counselor before securing this type of loan.

In most reverse mortgages, the borrower is required to live in the home as their primary place of residence. When they move out, or do not live there for much of the year, they could lose the home to the mortgage lender. This could happen in several situations.

• Moving into Assisted Care: Senior citizens who move into assisted care facilities and remain there most of a year could lose their home to the lender since the facility becomes a permanent residence.

• Secondary Homes: Those who have more than one home, and use their second home as a retreat for part of the year, must ensure they spend most of the year in their primary home. For example, if you live in Ohio but like to spend your winters in Florida, you may need to reside in your Ohio home more than in Florida.

Read documentation about the primary residence provision of your reverse home loan. Some loans require a minimum amount of time to be spent in the home per year.

There is a range of costs associated with the reverse mortgage. Every loan is different in the amounts of these fees, but an individual should know what they could be paying for the mortgage.

• Loan Origination Fee: This fee compensates the lender for processing the loan. Sometimes these can be up to two percent of the home's appraised value. This fee may need to be paid prior to obtaining the loan.

• Closing Costs: These are costs from third parties associated with establishing the reverse mortgage. They often include
  • Appraisal services
  • Title search and insurance
  • Recording fees
  • Credit checks
  • Inspections
  • Surveys

• Mortgage Insurance Premium: Some loans require an insurance payment or MIP, to be part of the fees associated with the mortgage loan. In FHA reverse mortgages, you may be charged a fee of 2 percent of the home's value or the FHA mortgage limit for your area, whichever is less, at the time of closing. This guarantees that you will not have to repay the loan for as long as you live within the home. It also insures that should you or your heirs sell your home to repay the mortgage, the debt owed is never more than the value of your home.

• Interest Rates: Adjustable rate and fixed rate reverse mortgages may be selected. Adjustable interest rates can be dangerous when interest rates are adjusting higher. Rates may adjust monthly or annually.

To learn about all fees associated with the reverse mortgage, request the fee schedule from your lender.

The reverse mortgage will need to be repaid in some situations. Usually, this does not happen until the last owner of the home passes away or the home is sold. There may be other situations where the loan becomes payable.

• You fail to pay property taxes, hazard insurance or violate other obligations associated with the property.

• You allow the property to deteriorate and therefore the value of it drops. Repairs must be made on the property to keep it in good condition.

• You move out of the home for most of the year.

• You fail to live in the home for twelve months in a row. For example, if you had a stay in a nursing home that spans over twelve months, the property may become payable.

• If your heirs wish to keep the property, they must repay the mortgage on it within a certain amount of time after your death. This may be done through another loan on the property.

The dangers of reverse mortgages can be overcome by fully understanding the terms of the loan. Having an attorney look through the documentation before signing it can help ensure the terms, costs and requirements are fully legal and understood by you.

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