What Are the Pitfalls of a Reverse Mortgage?

Staying Put

One pitfall with reverse mortgages is that you will need to pay the loan back, with interest, if you move out of your house. This will usually mean selling the house to pay off the loan. You will also be expected to maintain the home and stay current on all of your taxes. If it becomes physically or financially difficult for you to maintain your home, or to remain in your home, you could find yourself selling the property before you would like. If you move into a nursing home or hospital, most reverse mortgages allow you one year to return to your home. After this time, the lender will request repayment of the loan.

When you take out a reverse mortgage, you will need to pay a loan origination fee. Origination fees are capped at $6,000 per loan, but reverse mortgages usually come with other fees as well. You will need to pay closing costs and mortgage insurance fees of around 2 percent of the loan value. There may also be a monthly loan servicing charge and a mandatory credit counselling fee. Other fees may include an appraisal fee, pest inspection, credit report fee and flood certification fee. These fees can reduce the amount of money you will receive, so you need to budget accordingly. If you end up moving out of your home within a few years, the high fees can make a reverse mortgage a very expensive loan.

Bronwyn Belling, a reverse-mortgage specialist with the American Association of Retired People, reports in Smart Money that scams are very common among reverse mortgage sellers. She details one scenario in which a senior takes out a reverse mortgage and is then convinced to invest all the money in an annuity that does not pay out for many years. If you do take out a reverse mortgage, it is important that you get independent advice and decide in advance how you will use the money in your retirement planning. Another pitfall, according to Forbes, is that taking out a reverse mortgage may affect your Medicaid eligibility. Depening on your financial circumstanes, you may be required to spend the money immediately to maintain your eligibility.

By taking out a reverse mortgage, you are in effect selling your house while you still live in it. Because the loan must be paid back with interest when you die, you may not be able to leave your home to your heirs. One possible way around this is for the homeowner to take out a life insurance policy to cover the cost of the reverse mortgage loan in the event of their death. Taking out a reverse mortgage may also jeopardize your ability to obtain financing later, because the mortgage loan will show up as a debt on your credit report. Most seniors may not plan on moving, but carrying this large debt may affect your ability to help out a child with buying their first home.