Let’s look at the meaning of the word “mortgage.”
The word traces its history to old France.
The meaning of “mort” is “dead,” and the meaning of “gage” is “pledge.”
So, mortgage literally meant dead-pledge. To have a mortgage was to get a loan and promise to pay it back in within a specific period of time.
If it was paid back in full the pledge was considered dead.
If it wasn’t paid back in full then the land securing the mortgage was seized and therefore the land was now dead to the borrower.
When you first took out the mortgage on your home you may remember the Truth In Lending Statement.
That statement showed that in 30 years you would pay for your home about three times over.
In other words if your beginning mortgage was $100,000 you would end up paying about $300,000 because of the interest. You really didn’t notice this, however, because you were making payments every month.
The loan balance was going down and would one day be zero. We call this “amortizing” or killing the loan slowly every month until it is completely dead.
Reverse Mortgage is an Oxymoron
The word mortgage literally means to kill off your pledge. The opposite of that (or reverse) would be to make your pledge more alive – which makes no sense– but the term stuck anyway.
Since there is no payment being made, interest is being added to the loan every month and so the loan is actually growing.
Here are the top 5 reverse mortgage disadvantages:
With a Reverse Mortgage, Your Equity Stops Growing
The first disadvantage of a reverse mortgage is that any future growth in the value of your home (or additional equity) will be eaten up by the interest accruing on the loan.
That doesn’t mean the loan will consume your remaining equity. However, you really won’t benefit from new or additional equity.
The value of your home grows over time, but so does the balance of the reverse mortgage.
(Note, in the blog labeled why FHA is important I show an example of how the growth in home value is expected to equal the growth in the loan.)
Reverse Mortgages Eliminate Future Borrowing Capabilities
Once a reverse mortgage is recorded on your home it’s impossible to get an additional loan on the property.
For example, let’s assume that you’ve taken 60% of the equity out of your house with a reverse mortgage (leaving 40% still in place).
Now assume that you have an unusual expense (say for a plumbing repair).
Often, some people will take out a short term home equity line of credit to pay these expenses.
No lender will loan behind a reverse mortgage because of the growing loan balance.
Here’s what this means:
Once you get a reverse mortgage, you may no longer borrow against your home. It is important to be aware of this and to make sure you will have enough cash or credit available to be able to pay for future problems.
Most people think of foreclosure as an event that occurs when you don’t pay your mortgage.
Foreclosures can happen for other reasons too.
For most people, if your home has no mortgage, you are not obligated to maintain anything other than property taxes.
You can choose not to have homeowner’s insurance.
Nobody can force you to have it.
If your roof starts leaking, you can live in a wet house. (It’s your house….)
If you leave the house for more than a year (say, due to health problems) no one can make you have to sell it…
…unless you have a reverse mortgage.
Once you get a reverse mortgage, you have new rules to comply with.
Specifically, you have to:
- Pay property taxes
- Maintain homeowners insurance
- Keep the home repaired to FHA standards
- You must not leave the house for more than 365 consecutive days
Any of the above not being met can lead to foreclosure.
Many seniors bought a homeowner’s insurance policy on their home 20+ years ago.
Imagine that amount was $25,000. Now moving forward 30 years, the house is now worth $250,000.
The value grew by 10 times, but the coverage was never increased. This means the insurance premium stayed the same all that time.
Now, the loan will require a new policy for the actual home market value.
This means paying a lot more for insurance.
This one element has caused “sticker shock” for many seniors during the underwriting process.
A similar scenario happens when a FHA mandated repair to the property is a requirement to make the loan.
This can be a real problem for some people. If your home has been poorly maintained, you may have to fix some problems before you can be approved for a reverse mortgage.
The Future Equity Gains That You’ll Give Up.
No matter what the amount of the loan or the interest rate the fact is that the money taken now is a loan.
Since there is no payment being made, interest will make the loan grow. That is a direct cost against your future equity.
If the interest rate is low hopefully the equity remaining in the home after taking the loan will remain in place. If the interest rate is high you could be in danger of giving all of the remaining and future equity to the lender.
With all of these negative, are reverse mortgages still a good product?
The truth is, a reverse mortgage isn’t the right solution for everybody.
If you are considering a reverse mortgage, you need to work with someone who will have your best interests in mind.
In fact, while we here at It’s Still Your Home don’t even sell reverse mortgages, I write about reverse mortgages as an alternative.
This is because in many cases, you’d be better served with a reverse mortgage than with the products we can offer you.
I’ve worked with the very best professionals in the reverse mortgage business. When someone is better-suited to a reverse mortgage than to our products, we will refer you to someone who will treat you honestly and fairly.
With that in mind, if you’d like to investigate a reverse mortgage, click in the picture below to gain exclusive access to my hand-picked team of seasoned reverse mortgage pros.