Disadvantages of Reverse Annuity Mortgages

Be sure you understand the potential disadvantages of reverse annuity mortgages before you make your final decision on this unique type of loan. It can be an excellent option for many homeowners; however, a reverse mortgage has its downsides.

Learn the pros and cons of a reverse mortgage.

With a traditional mortgage, a homeowner has only two ways to obtain cash from their home:

• Sell the home - Pay off the balance of the mortgage and any remaining cash is given to the homeowner when the home sale closes escrow
• Take out a home equity loan or home equity line of credit - Borrow against the equity in the home and receive cash. The homeowner then makes monthly payments to repay the amount borrowed

A reverse annuity mortgage, commonly called a reverse mortgage, is a loan that homeowners can make against their homes. The loan does have to be paid back as long as the homeowner lives in the home. The homeowner can receive the cash in one lump sum or the funds can be paid to the homeowner in regular payments. Some reverse mortgage programs also allow the homeowner to set the cash aside as a credit line, similar to a home equity line of credit, drawing on the cash only when needed.

The homeowner can use the cash from the reverse annuity mortgage any way they want including living expenses, medical expenses, travel, education, or to pay off other loans. This cash makes a reverse annuity mortgage a particularly interesting mortgage option for seniors who have a limited income and whose primary asset is their home. The reverse annuity gives them an additional source of income.

With a reverse mortgage homeowners continue to live in their home and are responsible for the taxes, homeowner's insurance and home repairs. If they fail to pay any of these obligations, the balance on their reverse mortgage can become immediately due and payable.

Interest charges are added to the loan balance each month. The amount of the loan balance will continue to grow until the loan balance is paid off.

A homeowner does not have to pay back a reverse mortgage as long as they are alive and living in the home. The homeowner, or the homeowner's estate, pays the lender back what was borrowed plus interest when the homeowner dies, sells or moves out of the home.

Most reverse mortgages have very simple eligibility requirements:

• The homeowners must be at least 62 years old
• All of the homeowners must sign the loan application
• The home can be a single-family home. Many lenders also offer reverse mortgages on multi-family homes such as duplexes, condos, townhouses and co-ops. Usually a lender will not offer a reverse mortgage on a mobile home.

This type of loan can be a lifesaver to a homeowner who needs cash. However, there are some disadvantages to a reverse annuity mortgage.

Private sector reverse mortgages can include many expensive fees which are typically due when the loan is first approved. These fees can include:

• Appraisal costs
• Closing costs
• Insurance
• Servicing fees

To minimize fees, consider a federally-insured Home Equity Conversion Mortgage or look for a reverse mortgage offered by a state or local government. These public sector programs tend to have lower interest rates and fees than private sector reverse mortgages offered by lenders and mortgage companies.

Usually the reverse annuity mortgage must be a first mortgage. Any second or third mortgages on the home or property must be paid off before the new reverse mortgage is granted.

Since a home's equity typically increases over time, the homeowner (or homeowner's estate) with a reverse mortgage usually can pay off the reverse mortgage when they sell the home. The increased home equity is often more than enough to pay any interest charges that have accrued over the life of the reverse mortgage. However, if the home's value drops significantly, the homeowner's estate can end up having to pay cash to the lender for the difference between the home's selling price and the total amount due on the loan.

Reverse mortgages can have a negative tax impact on the homeowner's eligibility for federal and state assistance programs such as SSI or Medicaid. Some assistance programs consider loan advances from a reverse annuity mortgage to be income or may view the cash received as an asset. Too much cash or too many high value assets can make a homeowner ineligible for some assistance programs.

Younger homeowners may receive less cash from their reverse mortgage than an older homeowner. A lender will evaluate the life expectancy of the homeowner and divide the amount of the mortgage loan by the number of months the homeowner is expected to live. An older homeowner is not expected to live as long as a younger homeowner. The older homeowner would receive more cash each month than a younger homeowner would receive for the same home.

A reverse annuity mortgage can provide much-needed cash to older homeowners. This type of program is particularly interesting to homeowners who:

• Want to use their home's value to obtain cash to live on today
• Are comfortable with not having a home as part of their estate after their death

As with any financial decision, it is important to review the features and costs of this type of mortgage. There are disadvantages of reverse annuity mortgages that can make this type of loan the wrong decision for some homeowners. Do your homework. Review the programs offered. Understand the costs and fees. This could be an excellent way to make use of your biggest asset – your home.

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