The Bad Things About Reverse Mortgage

What Is A Reverse Mortgage?

It’s all in the name, a reverse mortgage is simply a mortgage in reverse. In a traditional mortgage the borrower makes regular payments on the loan, this builds up their equity in the home. Once the loan is paid in full, the borrower owns that home outright. In a reverse mortgage the borrower receives regular payments, in exchange they give up some of this equity to the bank. Reverse mortgages are only available to seniors over the age of 62.

Loan Details
Interest rate on loan, if you’re are just doing initial research please look at our rates page to get an idea of the interest rate you’ll likely pay. Alternatively you can fill out our form at the top of this page to get a quote that’s tailored to your unique situation.
Establishment costs, have a look at our fees page to get an understanding of how much you are likely to pay. In general reverse mortgages have fees of around $5,000 – $8,000 in total.
Monthly fees, these vary quite a lot but are generally around $25 – $35 per month

Home Details
Value of your house, it’s best to get a licensed real estate agent to do a valuation of your house. This typically costs around $300, if this isn’t an option or you are just wanting to get an overall idea then have a look at similar local property’s sale prices.
Assumed annual increase or decrease in home value, this will help determine whether your house will increase or decrease in value. In most cases houses will at least match inflation (2-3% usually) but each area is different so when you get your property valued please ask your estate agent their estimate on future housing prices.
Payment Details

Initial lump sum, this is the amount of money you’d like to receive as a lump sum at the start of your mortgage. Please DO NOT include any fees/charges that are associated with your reverse mortgage as this has been taken into account above.
Ongoing monthly payment, this is the amount of money that you’d like to receive monthly.
Years of monthly payment, this is the number of years you’d like to receive your monthly payment. If you’d like to receive monthly payments until you die then set this slider to 50 years.

How Does A Reverse Mortgage Work?

A reverse mortgage works by using the equity in the home to provide a security for lenders to borrow against without requiring monthly payments to be paid (instead monthly payments are sent to the borrower). By only lending up to a certain percentage limit (usually ~40%) lenders are able to ensure that they will be able to recoup the principal and interest that was loaned at the end of the mortgage.

How Can You Cancel Your Reverse Mortgage?

Cancelling a reverse mortgage can be extremely tricky. In most cases there is a cooling off period of 15 days, if a borrower cancels within that time period they are not responsible for any fees associated with the reverse mortgage (including exit fees). If it’s outside this time period then it’s on a case by case basis and will depend on the contract signed by the borrower.

Maybe every heaven has its hell, and maybe every right has a wrong or maybe everything has its converse. Reverse mortgages, despite their obvious pros, have their cons which every senior must note. These may emanate from the schemes themselves or from the providers. Like in any noble service provision industry, it is very possible to find a provider that will generate a lot of complaints about reverse mortgages.

Different Regimes Of Reverse Mortgages And Their Pitfalls

According to HecmLoan, the uninsured reverse mortgage allows a senior to borrow money but for a specific period of time. When the loan period is over, the lender will be in a legal position to demand the unpaid loan. It is possible to imagine that some borrowers may not be able to pay and thus be subjected to the embarrassments of foreclosure at a very senior age.

The federal government can issue federally insured reverse mortgage. This is where the government stands in as a surety for the mortgagor. The disadvantage of this as a reverse mortgage is that there is a cap on the amount that can be borrowed.

Financial institutions offer proprietary or lender insured reverse mortgages. The reverse mortgage complaints received concerning this system is on the interest rate that is applied by the lenders. A borrower may also acquire a single purpose reverse mortgage. For the lay person, this intricate weave may be the reason why a reverse mortgage is such a bad idea.

Closely related to the above is the limited choice available to borrowers. If a bank has to offer a senior a loan, then they will, without exception, present a standard form contract for the borrowers’ signature. It is therefore in the interest of parties to such a transaction to carefully read the fine print. It is only then that they will identify the potential pros and cons of a particular reverse mortgage. 

Shrinking Home Equity
The core idea behind reverse mortgages is home equity, that is, the difference between the loan outstanding to the lender and the fair market value of the property in question. The simple differentiation of how a reverse mortgage and a traditional mortgage is affected by it. It embodies a downside to reverse mortgages.

With the traditional mortgage, the debt to the lender will reduce while home equity increases. On the other hand, reverse mortgages are built on the ground that with every monetary advancement of money to the borrower, his/her home equity will reduce. This invariably means that the homeowner will lose the home with every sum received.

Although it has and will be argued, quite truthfully, that this is a revolutionary scheme, one must exercise due care and diligence before taking a step.