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For one thing, a reverse mortgage has the same fees as a traditional FHA mortgage (see more details below) but are higher than conventional ones because of the insurance costs. These costs includde FHA mortgage insurance and an origination fee. Between the higher interest charges and the upfront fees you might be surprised at how little money you actually get. While it’s your equity, the bank will get a lot of it.
Second, your heirs might not get the house. With a reverse mortgage the loan is paid off when the house is sold. This means your heirs won’t get the house. However, it is possible for them to keep it if they pay off the reverse mortgage after your death. However, as a rule this means that the money will come out of your estate, which will reduce the total amount that your children and grandchildren will get. If you hope to leave a legacy, this can be a real negative.
A third con is that if you move out you will have to repay the loan. The fact is that the only way you can keep from having to repay the loan is by staying in the house. You will be considered to have “Moved out” if you haven’t lived in your house for a year. This includes if you moved into a long-term care facility. This means if you are no longer able to stay in your home, you must start repaying that reverse mortgage – at a time when money is likely tight for you. This can put a strain on any budget.
It’s important to keep in mind that you will still be responsible for maintaining your home and paying its costs. You will need to pay property taxes, your homeowners insurance and for regular maintenance on the house. Even if you can get a reverse mortgage big enough to cover all these expenses, this can still make for a difficult situation.
Finally, the balance of the reverse mortgage loan gets larger over time while the value of the estate or inheritance might decrease. While your Social Security and Medicare will not be affected, Medicaid and other need-based government assistance programs can be affected if you withdraw too much funds and do not spend them in one month. Finally, reverse mortgages are not well understood by most people. Fortunately, there is independent reverse mortgage counseling available that can help.
Making these loans more appealing
The financial service companies have tried to make these loans more appealing. One Columbia Business School professor said that "home equity is the key to Americans' retirement security, so it's crucial to responsibly offer reverse mortgages.”
Some financial advisors are even promoting reverse mortgages as a sort of standby credit. These are not like home-equity lines of credit that can be frozen during a financial crisis. In comparison, reverse mortgages will always stay open. If you leave the mortgage untapped, your credit line will actually grow each year by the interest rate you are charged. This makes it a great way to build a hedge against future financial needs.
Approach it carefully
You do need to approach a reverse mortgage carefully given the stakes involved. Here’s how:Weigh the costs
If you were to get a reverse mortgage on a $500,000 home, you could pay $2500 for mortgage insurance, $3000 in closing costs and a $6000 origination fee. Given these steep upfront costs, this makes it even more important to take a hard look at other resources. For example, do you have a cash-value life insurance policy you could tap? Or could you trim your spending?
You would have to pay these closing fees even for a line of credit that you don’t use. In this case, there would at least be a peace of mind knowing that you have a sure source of cash and don’t have to sell if times get tough.Make sure you will be staying put
If you think that you will be in your home for many years, than a reverse mortgage could make sense. Just remember as you age, you might want to make a move. For example, you might decide you want to be closer to your kids or grandkids. While a reverse mortgage may no longer be something of a last reboot sort, it’s still a tough call.