Are you currently “house rich and cash poor”? If so, a Reverse Mortgage Loan allows you to turn the equity in your home into hard cash. You can use this cash anyway you choose. Plus, you get to remain in your home for as long as you want.
And, with the implementation of the new Reverse Mortgage, the borrower is now better protected. However, there are still some cons of a reverse mortgage that you need to know about before taking the leap.
Common Concerns, Risks and Cons of a Reverse Mortgage Loan
These are the risks and cons of a reverse mortgage loan that every potential borrower should know about:
- Diminishing Equity – One of the cons of a Reverse Mortgage Loan is that you are essentially spending up the equity in your home. This diminishes your estate’s value more and more over time.
- Time – Unlike traditional mortgages, Reverse Mortgage Loans take time to process. Basically, you and your lender are at the mercy of FHA and its new Reverse Mortgage rules and regulations. However, the loan is backed by HUD, giving you much more security than a traditional mortgage loan.
- Interest – Although you don’t have to make any payments on the loan during your lifetime (or your spouse’s), interest continues to accrue during that time. This can be a con for your heirs. However, the appreciation of the home could help your heirs break even in this department.
- Insurance – You must purchase the required FHA mortgage insurance premium upfront. With these mortgage loans, the lender is taking all of the risk… giving you money with no expectation of payments until you’re gone. Mortgage insurance covers this, as well as any losses incurred if your heirs default on the loan later in time.
- Costs – The closing costs and fees associated with a new Reverse Mortgage are generally higher than most traditional mortgage loans. So, if you’re planning to move out of the home within the next couple of years, this type of mortgage product may not be for you. Interest rates associated with these mortgages are generally higher as well.
- Program Changes – When you get a new Reverse Mortgage Loan, you’re protected under the current guidelines at that time. And, although the latest program aims in the direction of protecting borrowers, the future of these mortgage products is unknown. Thinks can change at any time.
It must be made clear though that because the New Reverse Mortgage is just like any other loan. The lender will still require monthly property taxes and homeowner’s insurance to be paid. These two items are required regardless if you have a mortgage or not, however if you default on paying these items while you have started a reverse mortgage, you run the risk of a potential foreclosure. Think of it this way, the lender has allowed you to access equity in your home without having to make any payments on that advancement. They require you to keep up to date on your taxes and insurance. If you don’t make those payments, they will want to mitigate risk in the event a disaster or unforeseen event might happen, and will foreclose on the home without that assurance of insurance and taxes. As I mentioned, They are required to be paid whether or not you have a loan regardless, so just be sure to set reminders every month to pay those, or set aside a reserve to pay those yearly when they come due (check with your local state tax commission to see when the property taxes are due in your area). One very popular is to set up automatic payments from your bank account to be paid every month to keep you up to date on the taxes and insurance.
With the new Financial Assessment rules released May 1st, 2015 by the Housing and Urban Development department and also the Federal Housing Administration, requires applicants if they meet certain guidelines, monies will be set aside from the equity you will receive to be put in a reserve account to cover any missed or late payments with taxes or insurance. You should not rely on this reserve account if you have it, rather consulting with a licensed and experienced mortgage consultant will help you to create a finacial plan to help in planning for these future responsibilities.
Educating Borrowers about the New Reverse Mortgage Loan
There are some complexities related to the new reverse mortgage loan. As a result of this, you must participate in free, mandatory mortgage counseling. It must be provided by a Department of Housing and Urban Development agency-approved independent third-party. You can also turn to AARP or any other national counseling agency dedicated to helping homeowners understand alternate mortgage financing options.
Reverse Mortgages give you the power to enjoy your hard earned equity without having to worry about making mortgage payments. For more information, Contact Shaun Russon, your Reverse Mortgage Loan Specialist.
