Five Possible Pitfalls to Consider with Reverse Mortgages

The obvious advantages to using the reverse mortgage are that you don't have to pay it back. There is no tax and no withdrawal penalty.

However, the Reverse Mortgage loans have several pitfalls.

1) They are very expensive. Up-front fees, totaling thousands of dollars, and often monthly service fees, drain home owner equity. In addition there are the third party closing costs including surveys, inspections, appraisal, title insurance, recording fees, etc. Be sure to shop around for the best prices on interest rates, service fees, and closing costs. The Reverse Mortgage business is very competitive. You may find that a credit union has more favorable terms than a bank but not all credit unions offer Reverse Mortgages. Reducing upfront fees means more equity. No matter what mortgage lender you use, make sure it is approved by the Federal Housing Administration (HECM).

2) In addition to the upfront fees, there are payment choices that can end up costing you a lot of money. In general, it is better to accept the payout as an ARM with a line of credit, unless you need a lump sum that you will spend immediately. (Whether taken in the form of a lump sum or monthly payment, spending it all in the same month you receive payment, means it won't affect your eligibility for Medicaid or SSI). If you don't use the lump sum immediately, it will go into a bank where you will probably earn less interest than you are charged for various fees. The unused cash in The ARM's line of credit doesn't accrue interest against the equity of the home.

3) The Reverse Mortgage Loans are difficult to understand. Potential customers don't always ask the right questions or understand the answers they receive.

4) Although the HECM program requires counseling, the counseling, usually provided over the phone, is often incomplete and is too generic to address individual needs. Reverse Mortgages can affect eligibility for Medicaid and SSI. Consider where you will go if you can no longer live independently. How will you finance nursing home living costs when your home equity is gone? How long might you be in a nursing home? Generally, if your home is vacant over 12 months, the lender can demand repayment of the Reverse Mortgage.

5) While it is true that the lender cannot demand payment or take your home as long as you are living in it, you still have to pay taxes, insurance, and maintenance costs. If these expenses increase to the point where you can no longer pay them and you default on any of these, you violate the terms of the mortgage and provide grounds for foreclosure.

Check out these websites for free information, if you are considering a reverse mortgage.

• HUD's Home Equity Conversion Mortgages for Seniors
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• AARP reverse mortgage information
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