Benefit Versus Risk with Reverse Mortgage Loans

Reverse Mortgage Benefits:

•  No more monthly mortgage payment until the owner dies or sells the home and borrowers receive income monthly (like an annuity). This is the most attractive feature of reverse mortgages.

•  The reverse mortgage loan amount never exceeds the value of the house. The loan is repaid from the borrower's estate or the eventual sale of the home when the last surviving borrower no longer lives in the home.

•  There are no income or credit requirements for a reverse mortgage. There is also no risk of default, and borrowers can receive payments and remain in their homes until they die or are no longer physically or mentally able to reside there. The only way the borrower can default is if they don't keep the taxes and insurance paid.

•  Once a reverse mortgage is executed, borrowers can never outlive their equity, and the home cannot be taken from them. On each reverse mortgage there is an upfront mortgage insurance premium paid to ensure that that never happens and the bank doesn't lose their money either.

•  Heirs don't like reverse mortgages because it puts their inheritance at risk. However, reverse mortgages are non-recourse mortgages, meaning that the heirs or the estate will never be responsible for any overpayments to the borrowers.

Reverse Loan Risks:

•  Reverse mortgages do not require a monthly payment so your debt always increases and your equity always decreases because you're trading equity for cash.

•  All reverse mortgages are not the same. Many have different fee structures, different interest rates and different closing costs.

•  A reverse mortgage can provide tax-free income if done properly, if not they can create tax liability.

•  HUD says, "There are several risk factors that make a fixed rate HECM a poor choice for many seniors." As a result, HUD now requires that HECM counselors highlight the risks related to fixed rate HECMs to their clients during a counseling session.

•  HUD says, "Borrowers with a closed-end loan will not be able to prepay the loan and draw any additional funds." Does this mean that a borrower cannot refinance a fixed-rate HECM?

•  Drawing the entire loan balance at closing exposes the borrower to a number of risks, including the risk that the interest payment on the HECM loan would be greater than the interest paid by an alternative investment vehicle (e.g., interest bearing savings account).