[Disclaimer]
For reverse mortgage loans:
The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, hazard insurance. The borrower must maintain the home. If the homeowner does not meet these loan obligations, then the loan will need to be repaid.
What are the risks involved with a reverse mortgage?
Any complex financial transaction involves a certain level of risk, and reverse mortgages are no different. While they come with safeguards, it’s important to understand potential risks before moving forward.
Below, we look at five common concerns about reverse mortgages and how likely they are to impact borrowers.
Will your children inherit the home?
Whether your children inherit the home depends on several factors. These include:
- the size of the loan
- your and your heirs’ wishes for the property
- the value and liquidity of the estate that could be used to pay off the reverse mortgage
It’s important to know that a reverse mortgage loan must be repaid when the last borrower passes away. Most often, heirs sell the home to repay the balance. They could also pay off the loan and keep the home. If they’re aged 62+ and eligible, they may even be able to take out their own reverse mortgage.
Talk to a financial advisor if you plan to leave your home to your children. They can help you explore your options.
Can you lose your home?
It’s possible if the loan terms are not met. Reverse mortgage borrowers aren’t required to make monthly mortgage payments to remain in their home. However, like all mortgages, this is subject to the lender’s lien on the property.
The borrower must meet all loan obligations, including living in the property as their principal residence, maintaining the home, and paying property charges, including property taxes, fees, and hazard insurance. If the homeowner doesn’t meet these loan obligations, then the loan will need to be repaid.
Fortunately, there are protections in place, including mandatory counseling to educate potential borrowers about how reverse mortgages work. In the counseling session, borrowers will receive written documentation that discloses each fee and have the chance to ask questions.
A financial assessment is also required to confirm that the borrower can afford ongoing homeownership costs. If not, a portion of the loan funds may be set aside through a Life Expectancy Set Aside (LESA) to pay property taxes and insurance directly.
Will you be surprised by the fees?
Not likely. Like any loan, a reverse mortgage includes fees and costs. But unlike many other types of loans, reverse mortgage borrowers are required to meet with an independent HUD-approved counselor before they can apply. Fees, interest rates, and loan terms are explained in full during that session. As previously mentioned, borrowers will receive written documentation and have the chance to ask questions during this session.
Can you outlive the money?
It’s possible that a borrower could spend all of the loan proceeds. However, running out of money doesn’t make the loan due unless other loan obligations are not met. To help reduce this risk, the Home Equity Conversion Mortgage (HECM) loan option limits how much borrowers can access in the first year.
Will you owe more than the home is worth?
This is a common concern, but no. Reverse mortgages are considered non-recourse loans, which means that if you default on the loan, or if the loan can’t otherwise be repaid, the lender can only enforce the debt through the sale of the property and can’t look to your other assets (or your estate’s assets) to meet any outstanding balance.
If the loan balance is higher than the home’s value, your heirs will not be responsible for paying the difference when the home is sold. If the home’s value is greater than the loan balance, any remaining equity belongs to you or your estate.
Final thoughts
Reverse mortgages include features to help manage risk, but like any financial decision, they aren’t one-size-fits-all. Talk to a licensed loan advisor or financial professional to review your situation and goals. They can help you decide whether a reverse mortgage is the right fit for you.
[Disclaimers]
This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.
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