One of the sure-fire ways to truly understand a product is not by listening to all of the good that it can potentially do, but also to understand what the negatives are about. The reverse mortgage program has many positives that we have written about for years, but there are also some disadvantages that need to be addressed. You should discuss these with your licensed expert and bring them up during your independent counseling session.
The reverse mortgage program, much like a 30 year fixed traditional mortgage, is not for everyone, sometimes it may be better just to do a standard cash out refinance and pay the amount back over a series of years. It may also be better to go ahead and get a standard HELOC (Home Equity Line of Credit) than a reverse mortgage. Everyone’s situation is different, and the decision is obviously with you as a consumer to make the choice that fits your situation.
Having been in the mortgage industry since 2004, I have heard many of the same complaints about the program. The one that is constant is the cost of the product; it is not a cheap loan product to get. How you use your reverse mortgage though could make the cost well worth it as in some cases it could save you capital in the long term and, in some cases, create a really nice nest egg for your heirs. But more on that later.
The reverse mortgage costs are pretty straight forward.
The Federal Housing Administration (FHA) requires the initial Mortgage Insurance Premium (MIP), loan origination fee, and title insurance to be part of the cost. These closing costs can be financed into the loan; however, paying for the upfront costs out of pocket will save you more in the long run. That’s because the closing costs can be financed into the loan. Most lenders costs are roughly the same because FHA has determined a formula for what the costs will be and where origination is capped.
One of the other big issues with a conversion mortgage is when the loan comes due. Typically if you are going to get a reverse mortgage on your home, the assumption is that you will want to live there until you pass away. The home must be your primary residence, which means that you must live in that home for more than six months every year. If you become sick and are moved into a hospital, or a nursing home for some reason for longer than six months the loan will come due.
Of all of the positives that this product can afford you, eliminating your monthly mortgage payment* (if you have one) is a huge burden off of your financial future. As mentioned above though, there is a reverse mortgage program where you can opt to continue to pay the same amount you normally would into the line of credit and you can watch that line of credit grow. The theory is that you take out a reverse mortgage line of credit, and then do not touch the line of credit unless you need to. The line of credit will increase over time, independent of the economy. If you get a reverse mortgage when your home is valued at $200,000 and in five years the economy decides to go into one of its dives, the amount of your line of credit will still grow based on the time you took the reverse mortgage out. Your home itself may be appraised at the time of the economy dipping at $150,000, but your Line of Credit would be based off of the amount you took out when you closed your loan.
All in all, the reverse mortgage product is not for everyone. Before entering into any mortgage product, reverse or traditional, it is always best to consult with a financial advisor.
*Homeowner is still responsible for taxes, insurance and property maintenance.