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What are Some of the Risks of a Reverse Mortgage?

Reverse mortgages can be a great way for older homeowners to supplement their income, pay for major expenses or complement an overall retirement plan. But, like any loan, reverse mortgages do come with certain risks. At Alpha Mortgage, we believe that knowledge is power  and that understanding potential risks can help our customers reduce their chance of problems down the road.

To help you better understand these risks, take a look at the following and then speak with a reputable reverse mortgage specialists to discuss whether or not a reverse mortgage is right for you.

Foreclosure

The highest concern for many reverse mortgage borrowers is the threat of foreclosure due to getting in over their heads with the loan obligations.

With reverse mortgages, the homeowner is not responsible for making monthly payments – instead, they receive money, either in a lump sum or in regular payments. Despite the freedom from having to pay principal and interest payments each month, the reverse mortgage isn’t free. Borrowers are still responsible for paying their homeowners insurance premiums and property tax bills. They must also pay for much of the fees associated with the mortgage. Those who opt for a lump sum may find themselves in a tough financial position if they haven’t secured another means of income and once the money runs out, they are unable to keep up with those obligations.

When a reverse mortgage borrower fails to pay their mortgage insurance premiums, property taxes or neglects to maintain the upkeep on their home, the lender may be able to call the loan due. If the borrower is unable to pay off the mortgage, then the loan may go into default and the home may be foreclosed.

Disreputable Lenders

Like many lending industries, the reverse mortgage market has seen its share of unscrupulous lenders that preyed on naive senior citizens. Because senior citizens often trust that these lenders, they may be less likely to recognize, let alone report, the shady tactics.

To avoid disreputable lenders, take the time to do some research and ask around for recommendations from friends and family. Before contacting a particular lender, check their rating with the Better Business Bureau and/or NRMLA’s website (National Reverse Mortgage Lenders Association). When you meet with them, don’t hesitate to ask questions. If the person you’re speaking with is vague or reluctant to disclose information, take that as a warning sign.

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Issues When Both Borrowers are Not 62 or Older

A reverse mortgage does not have to be repaid until all borrowers on the loan no longer live in the home. Whether through relocation or death, reverse mortgage borrowers do not have to repay a penny until the home is no longer their residence. The important thing to note here is that this rule only applies to the people named on the loan paperwork. In other words, if a married couple has a reverse mortgage and both their names are on the loan, then the balance will not be called due until both of them no longer live in the home. Unfortunately, some senior homeowners have had to face eviction due to the fact that they did not understand this rule.

Some couples choose to only put the mortgage in one spouse’s name. Usually this is because only one of the spouses is old enough to qualify at the time they apply. If Mr. X is 62 but Mrs. X is only 61, then Mr. X is the only one who could be on the mortgage. If bad luck befell Mr. X and he passed away before his wife could be added to the mortgage, then the loan would be called due. If Mrs. X cannot afford to pay off the loan in full, then she may lose the home.

Loss of Inheritance Money

Most borrowers count on the sale of their home to cover the reverse mortgage debt, but the risk of this lies in the market’s unpredictability. If you pass away, leaving a $200,000 reverse mortgage balance and the market value of your home is only $100,000, then the home will be sold at a loss. This won’t mean that your heirs are responsible for the difference, but it does mean that they won’t be able to receive any money from the sale of the home.

Thank you for taking the time to explore some of the potential risks of a reverse mortgages. Please consult with a licensed reverse mortgage professional in your area for more information on these topics and to learn if a reverse mortgage is right for your unique scenario.

Related Posts on the Risks Associated with Reverse Mortgages: FHA Announces Reverse Mortgage Foreclosure Alternative

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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.