This page, Reverse Mortgage Pros and Cons, will explain the benefits as well as the disadvantages of reverse mortgages.
Sometimes people will say “If something sounds too good to be true, it usually is.” I could not agree more. That is why Reverse-Mortgage-Colorado.net includes this page so you can learn about both the pros and the cons of reverse mortgages.
Whenever I think about pros and cons, good and bad, advantages and disadvantages, I always remember the old movie, “Oh God! Book II”. George Burns plays the role of a lovingly simple God who is trying to get the Word out through a young girl. There’s a scene in the movie where she asks Him why bad things happen.
God explains it to her by saying that there has to be an opposite. If everyone always experienced only the good in life, how would anyone know that it was good without having something bad to compare it to. Please be advised that this is a terrible oversimplification of this scene, but you get the point (I hope).
Reverse mortgages have their pros and their cons, just like conventional mortgages and even homeownership. Even people have their pros and cons, good and bad. Just ask my wife – but she loves me anyway.
What I’ve done here is to attempt to break down the reverse mortgage pros and cons into easy to read categories. However, please keep in mind that not everyone has the same definition of advantages and disadvantages. One person may have the goal to die broke while another thinks it’s terrible not to leave a legacy for their family. I’ve worked with both on many occasions.
To each his own. To do a reverse mortgage is ultimately your decision. My job is to make sure that you have accurate information so you can make as educated of a decision as possible.
Reverse Mortgage Cons (Disadvantages)
#1 – A reverse mortgage will chew up all of your equity and you will have nothing left for your heirs. In addition to that, you may need it in the future to pay for health care costs.
This is one of the most common objections that people have against doing a reverse mortgage. If keeping as much equity in your home as possible is very important to you, then I recommend that you do NOT take out a reverse mortgage.
One of the things I tell every single person that is considering a reverse mortgage is the following:
Every month you will receive a statement that will show the amount of interest and mortgage insurance that has been charged to your account. Your balance will get larger each month, not smaller. So if looking at this statement and seeing the balance grow is going to cause you more stress than having the reverse mortgage relieves, then don’t do the reverse mortgage! This loan is meant to RELIEVE financial stress, not create more.
I have closed close to 1,000 reverse mortgages since 2003 and have never, ever had a customer, or an heir, tell me that they regret taking out their reverse mortgage. The reason is that I am very clear with people about this point.
If someone is not OK with the thought that they might use up all of their equity, then I don’t take an application from them to begin with. I will never talk someone into taking a reverse mortgage if they don’t feel 100% OK with this.
Having said all that, I don’t completely agree with this reverse mortgage con. Since we don’t loan anywhere near 100% of the value of the home, odds are that there will probably some equity left.
**** Note ****
If it is Greek to you as to why your reverse mortgage balance increases, please visit the Reverse Mortgage Facts page.
**** Thanks ****
Also, for people who are using some of the reverse mortgage funds to pay off an existing mortgage, it would be wise to take some of the monthly savings, if possible, and purchase long term care insurance or lifeinsurance to help defray some of the costs if you do need long term care or to leave a legacy when you die.
Either way, some people look at it as a disadvantage of a reverse mortgage, so I wanted to address it.
#2 – Reverse mortgages are too expensive
There is no getting around it. The FHA insured Home Equity Conversion Mortgage (HECM) is expensive to get in place. But you should ask yourself “Expensive compared to what?”
Can you honestly compare a loan that has no required monthly payment to one that can foreclose on you if you fail to make the required monthly payment? Of a line of credit with no required monthly payment and a credit line that can never be closed out, even growing larger the longer you keep it, allowing to access more of your equity, as long as you meet the property requirements*, to a static line of credit that requires a monthly payment (interest only) and has a credit line that can be closed any time at the lender’s discretion?
That is a very long winded way to say that I think the benefits out weigh the costs by a wide margin, but let’s look at the costs so you can make an informed decision on your own.
Closing Cost Breakdown
The closing costs can be broken down into three categories:
- Initial Mortgage Insurance Premium (IMIP)
- Origination Fee
- Other Closing Costs
Initial Mortgage Insurance Premium
This is a fee charges by the Federal Housing Administration (FHA). Typical mortgage insurance is charged on a “forward” mortgage loan when you borrow more than 80% of the value of the home. The lender charges this for their protection. They are only willing to loan you in excess of 80% because they have the mortgage insurance to pay them if they have to foreclose and end up losing money.
The IMIP on reverse mortgages serves the same purpose. Since a HECM is an open ended mortgage (the loan only comes due when the last remaining borrower permanently leaves the home, or fails to meet the property requirements*), the lender does not know how much will eventually be owed. Because no monthly payments are required, interest and mortgage insurance accrue and compound monthly on the outstanding principal balance . The mortgage insurance protects the lender if the loan balance exceeds the value of the home at the time the loan comes due. Since the lender is not losing money in this situation, they can never come back to you, your heirs or estate to collect any loss. This fee indirectly benefits you.
Cost of IMIP is 2.0% of the value of the home (up to the maximum claim amount of $1,089,300). For example, if you have a $500,000 home, the IMIP will be $10,000 ($500,000 x 2.00%).
FHA says the lender may charge an origination fee “not exceeding the greater of: (i) $2,500, or (ii) an amount equal to two percent (2%) of the Maximum Claim Amount of the mortgage, up to a maximum of $200,000, plus one percent (1%) of any portion on the Maximum Claim Amount that is greater than $200,000; subject to a maximum origination fee of $6,000.”
What this says is that the origination fee can vary depending upon the value of your home, but typically will be between $2,500 – $6,000. You can negotiate this charge with your loan originator. However, what a lender may charge will be dictated by market conditions. I am not going to get into the nitty-gritty of it, but when the lender sells the loan, they may get paid a premium (called Yield spread). This premium can vary wildly and will depend on the upfront amount of the loan.
For a lot of my customers in 2020 and 2021, not only did I not have to charge an origination fee, I could even give credits towards the other closing costs. This is because the companies I sold my loans to were paying very large yield spread premiums. However, beginning in mid-2022, the conditions flipped and I had to start charging origination fees. As I write this in early 2023, I am still charging origination fees and do no not know when or if it may change.
Other Closing Costs:
The “other closing costs” are costs that are standard on all mortgages. These include, but are not limited to the following:
- Appraisal charge
- Title insurance
- Closing/notary fee
- Credit report
- Flood certificate (to see if your property is located in a flood zone)
- Recording fee
- Document preparation fee
Most of the time, in Colorado, these fees will total around $2,400 – $2,600.
Please keep in mind that the company I work for, American Liberty Mortgage, Inc., does not collect any money from you upfront. You are charged all these fees, but you do not have to pay them out of pocket. The charges for the loan are all rolled into the loan itself.
*Property requirements are that the homeowner must live in the home as their primary residence, keep their name on title, stay current on the property taxes and homeowners insurance premiums, and maintain the home.
#3 – Money from a reverse mortgage is not free
All banks and lenders are in business to make money and reverse mortgage lenders are no different. But sometimes someone will ask why they have to pay interest to borrow their own money. Here is what I tell them:
A reverse mortgage is a loan against the equity in your home. Anyone who loans money will charge interest. This works no different than any other loan against your home. Whether it’s a normal 30 year fixed rate loan or a HELOC, the company loaning you the money will charge interest on the loan.
In the case of the reverse mortgage, the lender defers the interest until the last homeowner permanently leaves the home. When you no longer live there as your primary residence, the loan balance plus all accrued interest and MIP charges are due at that time.
#4 – Dealing with reverse mortgage sales people – Yuck! ????
This is probably the biggest disadvantage of a reverse mortgage! Some sales people will say or do anything to get the sale.
Unfortunately, some people look at reverse mortgages as the next big wave to jump on and take advantage of. You can typically tell who these people are by the feeling you get in the pit of your stomach when they start talking. Something just isn’t right.
Follow that gut feeling, and kick them out as soon as possible. You do not have to go with the first person you talk with. Shop around. But look at more than just the lowest fees.
Sometimes, the best, most qualified person is the one that doesn’t have to drastically discount his rate, fees or costs because he treats people the right way and has plenty of business. He wants to work with you, but he’s not willing to work for next to nothing, just to “get the deal”.
When making any major decision, use common sense and follow your gut. Also, check people out. Find out how long they have been specializing in reverse mortgages. See if they are affiliated with the National Reverse Mortgage Lenders Association NRMLA
Now that we’ve got the negative stuff out of the way, let’s talk about the good side of the reverse mortgage pros and cons coin.
Reverse Mortgage Pros (Advantages)
#1 – Getting a loan that you never have to repay as long as you live in your home
This is by far the biggest advantage of having a reverse mortgage. About 78% of the loans I closed last year were to people who had an existing loan on their home. One of the major reasons for getting a reverse mortgage for these people was to payoff that mortgage and stop making mortgage payments.
**** Note ****
Please note that when you have a reverse mortgage, the home stays in your name and you, must continue to pay your property taxes and homeowner’s insurance yourself.
The lender will not pay these for you.
****End of Note****
Just imagine how much longer your savings or IRA would last if you didn’t have a mortgage payment to make every month. A lot of people get a reverse mortgage with the sole purpose to pay off the existing loan on their home so that they can finally retire.
#2 – Easier to qualify for a reverse mortgage
The way I answer the expensive comment is with “compared to what?”. A HECM reverse mortgage is a unique program that really cannot be compared to a conventional mortgage. It’s more appropriate to compare it to an insurance product, but what insurance product?
It could be compared to long-term care insurance. But it can also be compared to an annuity in that it can create retirement cash flow. It can also be compared to an insurance against a home value decline. You can see this is truly a unique financial tool unlike anything else.
It really depends upon your particular situation:
- How long do you plan to live in the home?
- How do you plan to use the proceeds from the loan?
- Are you paying off an existing mortgage?
There are too many situations to go into detail on, but suffice it to say that this is a very customized program. it really depends upon your specific situation to fully answer the question of “Is a reverse mortgage too expensive?”
Please contact me and I would be glad to go through all of the costs with you and provide you with all the information you need to make an informed decision.
#3 – Improve the flexibility and security of your retirement
I know this sounds like some platitude that a politician might use, but it is true. I have a folder full of testimonials from people who have improved their retirement years and their lives with a reverse mortgage.
If you look at my testimonials page , you will see videos and stories from people who’ve used a reverse mortgage for everything from a new RV, to travel, to people who’ve paid off their mortgage and bills so they can sleep easy at night.
If you enter into the reverse mortgage with the right mindset about your equity, it really can help you breathe easier and live a more flexible, secure and full retirement.
#4 – Safety and fairness
I’ve been in the credit and mortgage business since 1987 and a reverse mortgage is by far the most heavily regulated loan that I have ever closed. There are more checks and balances from both the state and federal governments than I can count. Unfortunately, the down side of this is the voluminous amounts of paperwork.
But what else would you expect from a government insured loan.
That’s it. Hopefully this helps you to fairly evaluate the reverse mortgage pros and cons. I’ve tried to keep it as fair as possible, but remember that I am in the business of providing reverse mortgages so please know that I am of course bias towards thinking that reverse mortgages are, on the whole, a great product for the right person.
I recommend getting other people’s opinions who might not be biased, but please consider the source. Make sure that they understand how reverse mortgages work.
The most common misconception is that the bank takes the house when you die. If the person whose opinion you are seeking tells you this, you’ll know that they do not understand them and probably should seek out a more educated source.
Thanks so much for taking the time to read my reverse mortgage pros and cons page.
You can also learn more and stay up to date with changes in the reverse mortgage world by visiting my reverse mortgage blog page.