Reverse Mortgage Pitfalls

Research Your Options

It is important to thoroughly research reverse mortgages before signing on the dotted line. While it may seem like a great idea to obtain this type of loan, there are several reverse mortgage pitfalls that can be avoided by doing a little research and speaking with a mortgage counselor.

Types of Reverse Mortgages

There are three specific types of reverse mortgages available to seniors aged 62 and older. The types of reverse mortgages include:

• Uninsured
• Lender-insured
• FHA-insured

Each of these mortgages require:

• The individual receiving the income owns the home or unit.
• The home needs to either be paid off or very little is owed on the current mortgage.
• The owner will reside in the home for the duration of the mortgage.

Reverse Mortgage Pitfalls Explained

There are some definite disadvantages to using a reverse mortgage. The biggest detractor is not having something to will to your heirs. A reverse mortgage may also affect the amount of need-based assistance you receive from government agencies such as Social Security, Medicaid and Medi-Cal. The following is a breakdown of the disadvantages to each of the three types of reverse mortgages.

Uninsured Reverse Mortgage

An uninsured mortgage has the advantage of not requiring insurance premiums. The disadvantage of this mortgage is that the loan is for a specific period of time, not the lifespan on the individual taking out the mortgage. Once the loan period is over, the individual will be required to start making mortgage payments. There needs to be some source of income in order to take out this type of mortgage apart from the value of the home.

The interest rates on the uninsured mortgage can also be very high, resulting in a lower monthly payment to the borrower. If you are considering this type of mortgage, shop around for the best interest rate from the available lenders in your area.

Lender-Insured Reverse Mortgage

The reverse mortgage pitfalls for a lender-insured mortgage include the interest rates on the insurance premium and on the mortgage. The interest rate is based on the borrower's credit. Usually, you may choose from a fixed or adjustable interest rate; if you can find a low fixed rate, it may be the best option for you. As with the uninsured mortgage, the higher the interest rate, the lower the monthly payment will be to you from the lender.

Another problem for borrowers of the lender-insured mortgage is having something to leave to your heirs. Usually at the end of the mortgage, the home is sold and there is rarely any difference between the home's sale price and the mortgage amount to give to the heirs of the estate.

FHA-Insured Reverse Mortgage

The FHA-insured mortgage may have the least number of pitfalls for borrowers. The interest rate, as with the other types of reverse mortgages, has a direct bearing on the monthly payment amount of the borrower. There is also a limit on the total amount of the mortgage, currently $312,896.

Reverse Mortgage Counseling

It is important for anyone considering a home equity conversion loan to speak with a reverse mortgage counselor. These counselors know all the advantages and disadvantages for each reverse mortgage type. Knowing all the features and costs of each type of loan can help you determine which is the best for your particular financial situation.

A reverse mortgage can give seniors financial independence in their golden years. The equity that they have accumulated on their home can provide a line of credit and monthly income when it is needed most. However, a home equity conversion loan is not without pitfalls. Reverse mortgage income can adversely affect need-based income, and there may be less to leave your heirs after the sale of your home. All potential borrowers should speak with a reverse mortgage counselor before signing up for this type of loan.