Reverse Mortgage Pitfalls?
What are some reverse mortgage pitfalls you can think of?
- MRALv 47 years agoFavorite Answer
Not necessarily pitfalls per se, but some things to think about:
1) if you plan to sell within the next 2-3 years or so, you may want to hold off on it (or with any loan for that matter) as the closing costs can be high and you will be paying similar costs when you sell.
2) it is not so much a pitfall as something that needs to be understood: this is a negative amortization loan. The reason there are no monthly mortgage payments required is because seniors are usually on a fixed income and no longer employed; that is why this loan is only for seniors. But each month that you don't make a payment (you can, if you want), the interest will accrue onto your loan balance.
3) if you obtain one early enough (early 60s), and live longer than expected, AND the economy tanks like it is doing now, or your home does not appreciate fast enough, it is possible that the loan balance wll be higher than the home value at some point because of the accruing interest. this will not affect you personally unless you plan to move and sell, but it may affect your heirs after your death if they choose to keep the home as they must refinance to pay it off.
4) again, not necessarily a pitfall as you do get a benefit, and not only for reverse mortgages but for any FHA loan - there is a mandatory one-time upfront 2% mortgage insurance premium. This cost is what makes a reverse mortgage seem so expensive, but it actually applies to any loan that has less than 80% LTV. Unlike other FHA loans, however, with reverse mortgages it is for the life of the loan regardless of how much equity you have in your home.
5) not a pitfall again, but the home must pass FHA standards for habitability.
6) must be at least 62 years old by the time the loan closes escrow.
7) all owners, and only owners, must be on the loan (and therefore at least 62). No kids or spouses under 62.
8) it must be your primary residence. If you move permanently at any time, the loan will immediately become due.
9) typically the most you can get is about 70% of your appraised value. a lot of people complain that the lender doesn't give you in cash the full value of the house, but no safe loan would. they forget that it is a loan and you still own the house. many folks have the misconception that the bank takes over the ownership/title. lenders that loan folks 100% or more of their home value are partly responsible for the current housing crisis. Any slight drop in the housing market would instanly put your home underwater.
10) it is almost impossible to get a 2nd loan behind a reverse mortgage, because it is open ended.
11) if you are still working, or have high income, you lose the mortgage interest deduction because you are not paying it monthly. it can only be deducted in the year it was paid. eventually, when the home gets sold or refinanced by you or your heirs and the loan is paid off, at that point, you should be able to deduct all the mortgage interest accumulated through the years (check with your tax person).Source(s): I specialize in reverse mortgages (CA)
- floreyLv 43 years ago
opposite mortgages are stable for below some older people who desire funds bypass to proceed to exist. The loan is desperate up on a discounted fee status and it incurs extreme interest that eats up fairness rapid. the forged is that it ingredients funds jointly as ensuring that the older person nevertheless has a place to stay. yet another concern is that if the older belongings proprietor leaves the domicile it reverts to the lender. you could sell a house it extremely is undertaking to a opposite loan yet you could no longer lease it out. it is not a stable financial business enterprise transaction and is designed for the desperate.