While reverse mortgages can be a useful retirement planning tool for some, there are potential downsides to the product, according to a recent article on CNN Money.
In his article, Walter Updegrave presents aspects of a reverse mortgage that prospective borrowers should consider before taking out the loan. Among these considerations are the basic guidelines, the fees and costs associated with the loan (including whether a borrower can afford to maintain the home), non-borrowing spouse issues and alternatives.
Some of the fees related to the HECM program itself include a mortgage insurance premium of 0.5% of the home’s value at closing (2.5% if more than 60% of the maximum loan amount is drawn), plus an annual mortgage insurance premium of 1.25% that’s added to the interest rate on the loan.
Lenders may also charge an origination fee based on the value of your house, although the HECM program caps this fee at $6,000.
Like a forward mortgage, the borrower of a reverse mortgage also is required to stay current with homeowners insurance and property taxes and keep the property in good repair. Otherwise, the loan could go into default and the lender could demand payment.
Understanding what happens if a borrower moves or dies — particularly when a spouse is not listed as a borrower on the reverse mortgage — is critical when considering the loan, Updegrave says.
On Aug. 4 of this year, changes to policies regarding non-borrowing spouse scenarios went into effect, providing more protection for these people. Namely, the changes will allow non-borrowing spouses to remain in the home indefinitely under certain terms and conditions and if they uphold the original terms of the loan.
“The takeaway here is to make sure you understand the rights of anyone who may be living in the home has when one or both of the reverse mortgage borrowers die,” Updegrave writes.
Finally, consider downsizing before taking out a reverse mortgage, as this is another way homeowners can cash in on the equity in their home, he says.
Read the full CNN Money article here.
Written by Emily Study