If you're a homeowner aged 62 or older, a reverse mortgage might sound like the answer to your financial problems. However, these mortgages, in which older homeowners convert some of their home equity into cash without a home sale or making monthly mortgage payments, might not be the best choice for everyone. Here are five reasons why a reverse mortgage might not be for you, plus a couple of alternatives that could work better.
Reverse Mortgage Fees Might Be High
Like traditional mortgages, these mortgages come with a variety of fees, but they might be higher than the costs associated with regular mortgages. For federally insured reverse mortgages on homes appraised at up to $625,000, the mortgage origination premium is 0.5 percent of the value for mortgages below 60 percent of the home's value. But if you borrow more, you'll pay a 2.5 percent origination premium.
In addition, some lenders might charge additional origination fees that can soar into the thousands - all the way up to the $6,000 origination fee limit. You'll also pay real estate closing costs, similar to the fees charged for traditional mortgages.
You Have to Be at Least 62 Years Old
Reverse mortgages aim to help homeowners aged 62 and older get cash without having to move out of their homes. If you are younger, these mortgages aren't an option, and if your spouse is under 62, he or she can't be a co-borrower on the mortgage. Additionally, the amount of your reverse mortgage depends in part on the age of borrower or eligible non-borrowing spouse.
You Still Have to Pay Certain Home Costs
Though you may not have to make regular monthly payments on a reverse mortgage, you do have to show you have enough income to cover other house-related expenses. These include the home insurance premiums, property taxes, utilities, and maintenance on your home.
Reverse Mortgages Are Repayable When You Stop Living In The Home
if you move to a nursing home or die, or if your borrower spouse does, the mortgage must be repaid. And in the case of married couples, if only one is named as a borrower on the reverse mortgage and they're no longer living in the home, the remaining spouse might have to find a way to pay off the mortgage, and that might mean selling the property. The same holds true if there are others living in the home, such as other family members or housemates.
Reduces Your Estate for Your Heirs
Interest accrues during the time you have a reverse mortgage, so your debt load increases while your home equity decreases. This means that when you pass away and your home is sold (or your heirs pay off the mortgage), you'll have less equity in your home, and less of an inheritance for your beneficiaries.
Alternatives to Reverse Mortgages
If you're a homeowner thinking about getting one of these mortgages, but you're concerned about the costs and/or restrictions, consider getting a home equity refinance, where you borrow against the equity in your home and receive a lump sum amount of cash. You'll have to have enough income to qualify for the mortgage and make monthly payments on the amount you borrowed.
Another option is a home equity line of credit, which lets you borrow up to a preset limit while only paying interest on the amount borrowed (but bear in mind that you'll have to make monthly repayments on what you borrow). The costs might be lower and the restrictions far fewer.
Research your options carefully, compare home equity offers and get a free quote from lenders to help you make the best selection for your situation.