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Potential Drawbacks to a Reverse Mortgage

A Reverse Mortgage can be a great financial tool for senior homeowners who want to supplement their retirement income, help pay medical bills, fund home improvement projects or even purchase a new home. However, a Reverse Mortgage isn’t ideal for everyone. Just like any other financial product, a Reverse Mortgage carries a certain level of risk. 

Read about some of the most common potential drawbacks to a Reverse Mortgage below, and feel free to reach out to us with any questions or concerns. (855) 367-4326

Higher fees and rates

Compared with a traditional forward mortgage, the fees associated with a Reverse Mortgage may be higher. For instance, a Home Equity Conversion Mortgage (HECM, aka Reverse Mortgage) lender can charge an origination fee equal to $2,500 or 2% of the first $200,000 of your home’s value, whichever is greater, plus another 1% for any home value amount above $200,000. The maximum allowable origination fee is $6,000. By contrast, the average origination fee for a traditional mortgage is usually around $1,000.

Please note, these figures are subject to change and may have already changed by the time you read this. We do our very best to keep the most up-to-date information on our website; however, the best way to ensure you have the most accurate information is to give us a call or connect with us online.

Higher debt

A Reverse Mortgage is structured so that the homeowner is borrowing against the home’s available equity, therefore the loan balance increases over time. Add in interest fees and the debt could increase significantly over the course of several years. This will inevitably increase your debt load. Be that as it may, many Reverse Mortgage borrowers decide the higher debt is worth the freedom and flexibility they get from receiving the Reverse Mortgage proceeds. 

Interest is NOT tax-deductible

Proceeds received from a Reverse Mortgage are treated as loan advances by the IRS. For that reason, any interest paid on the loan is not tax-deductible.

Variable rates

Many Reverse Mortgages have adjustable interest rates. These rates are affected by fluctuations in the market and therefore could rise (or fall) periodically. Before you agree to a Reverse Mortgage, your loan professional should go over the details of your loan’s rate structure and provide you with a Total Annual Loan Cost Rate (or TALC rate). This is a special disclosure that informs the borrower of all costs associated with the mortgage. It is similar to the APR rate for traditional forward mortgages, but whereas the APR only takes the finance charges into account, the TALC rate considers finance charges as well as annuity premiums, appraisal fees, closing costs, etc.

Your lender should also provide you with an Initial Interest Rate (IIR) and an Expected Interest Rate (EIR). As the names suggest, the IIR is the rate at which your loan is originally calculated, while the EIR is what the lender estimates the average rate will be over the life of the loan. 

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Learn more about how people are using home equity conversion mortgages for purchasing homes:

Please keep in mind that the reverse mortgage industry is constantly changing and some of the information contained on this site may not be current. Please ask a licensed reverse mortgage professional for up-to-date guidelines.