Pros and Cons of Reverse Mortgages

February 14, 2014
David Ingram

Reverse mortgages help elderly individuals to meet their financial obligations and cover home-related expenses during retirement. Reverse mortgages can be structured in a variety of ways, and the money can be used for a wide range of applications, including covering monthly mortgage payments for the remainder of the borrower's life. While these loans can offer significant benefits to the right individuals, there are a number of drawbacks to consider before taking advantage of a reverse mortgage.

Reverse mortgages are designed to reduce elderly individuals' monthly expenses, but the up-front cost of these loans can be significantly higher than traditional mortgages. Common up-front costs include loan origination fees that can be double the amount for normal mortgages, and a HUD up-front mortgage insurance payment. Reverse mortgage fees are based upon the total assessed value of the home or the principal lending limit, whichever is less. This can boost initial fees to levels that are unrealistic on a fixed income. Despite the high up-front costs, however, reverse mortgage borrowers begin to realize cost savings as soon as the loan is finalized. The loan covers mortgage payments, but it does not cover property taxes, homeowners insurance or mortgage insurance.

Mandatory Counseling

A unique aspect of reverse mortgages is the fact that most lenders require borrowers to undergo consumer counseling before finalizing the loan. Counseling sessions inform mortgage-borrowers of the terms, fees, pros and cons of using a reverse mortgage, and counselors assist borrowers in creating plans for repayment of the loan and frugal management of the loan funds. Consumer counseling carries obvious benefits for borrowers who are unfamiliar with reverse mortgages' unique features and structure, and can help to avoid default and future financial hardship for those who are unprepared to take out a loan. A drawback of this requirement, however, is that counseling sessions can be time-consuming, and may be unnecessary for individuals who are already familiar with reverse mortgages.

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