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If you are considering a reverse mortgage but are wondering if there are any drawbacks, you’ll want to read this article. Specifically we’ll look at some reverse mortgage pitfalls, cover the costs of obtaining a reverse mortgage, reverse mortgage loan caps, and age requirements. By the end of this article you should understand some of the pitfalls of reverse mortgages and will be able to make an educated decision as to whether this type of mortgage is right for you.

High Reverse Mortgage Costs
One of the larger pitfalls of a reverse mortgage are the high fees. Fees for reverse mortgages are based on the value of your home, which is different from traditional mortgages where the fees are based on the loan amount. Most reverse mortgages sold are federally insured and known as a Home Equity Conversion Mortgage (HECM). For an HECM mortgage, origination fees alone are usually 2% of the home’s value, and then there is the mortgage insurance premium of 2%. By the time you add an appraisal, title search, title insurance, and other reverse mortgage closing costs the total loan fees can reach 5% or more of the home’s value.

Loan Caps
Since HECM mortgages are backed by the government, they have instituted a limit on the amount that you can borrow. These limits range from just over $200,000 to $417,000 depending on where you live.  So even if your home is worth more than $417,000 the maximum amount the government will allow you to borrow will be limited.

There are non-government insured reverse mortgages available, but just like an HECM, the closing costs are high. The benefit to non-government reverse mortgages is that there is no loan cap and in some instances you can avoid the mortgage insurance premiums.

Equity is Required
Although you do not have to own your home free and clear to obtain a reverse mortgage, you do need to have equity. Although there are some traditional mortgages on the market that allow you to borrow more than your home is worth, that is not the case for reverse mortgages.

Negative Impact on Medicaid
Often overlooked, the impact a reverse mortgage can have on Medicaid is one of the scarier reverse mortgage pitfalls. According to the National Reverse Mortgage Lenders Association, a reverse mortgage that is paid out in a lump-sum can impact Medicaid benefits. In order to avoid this significant reverse mortgage pitfall, the lender needs to ensure that none of the lump sum amount is remaining the month after it is received. Otherwise the remaining amount can count as a resource and will impact Medicaid eligibility.

Age Requirements

Another drawback to obtaining a reverse mortgage is the age requirement. You must be 62 or older to qualify for this type of mortgage. If the home is owned by 2 or more people, all owners must be over the age of 62.
Reverse mortgages are increasing in popularity among senior citizens who are looking to use the equity in their home to pay for medical bills and other expenses. However there are many reverse mortgage pitfalls that need to be carefully considered before taking out such a loan. High closing costs, loan caps and Medicaid considerations as well as equity and age requirements all need to be balanced against the need for income. Hopefully this article has provided some insight into the pitfalls of reverse mortgages and will help you make an informed decision.

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