The Risks of a HECM Reverse Mortgage
I’ve written at length about the advantages of a HECM so it’s only fair that I write today about the risks of a Reverse Mortgage as well.
Few people love Reverse Mortgages as much as I do but that doesn’t mean I’m blind to the aspects of the loan that could potentially cause harm. As I meet with my clients I try to help them understand these risks so we know that what they are doing really is the right thing for them.
Most of the dangers of a Reverse Mortgage revolve around the unknown. Questions such as how long will I live, will the Real Estate Market in Utah remain stable, will my family always live in Southern Utah, etc. There is an endless number of questions about tomorrow that we won’t know the answer to until tomorrow. This issue of variability is what causes the major concerns with Reverse Mortgages.
How long will you keep the mortgage?
The first caution is anticipating how long you plan on being in the home. I typically tell people that a Reverse Mortgage is either a short-term solution of 5-6 years or a permanent solution for life. A mid-term solution (10-15+ years) has its risks. Here is why:
- Short-term – On a Reverse Mortgage the two basic ideas are 1. You don’t make a mortgage payment, and 2. Because you don’t make a mortgage payment the interest is added to your loan balance. In the short term, you’re essentially breaking even. What you’re adding to the back of the loan is less than what you would have been making in mortgage payments, so if you decide to sell or refinance you’ve really just broken even.
- Permanent – As a permanent solution a HECM is wonderful because you know you own the home for life and regardless of how long you live you’ll never have to make a mortgage payment if you continue to meet the basic requirements of the loan.
- Mid-term – The issue with a mid-term scenario is that after 10-15 years in a Reverse Mortgage the accruing interest has used a good portion of your home’s equity which will make it harder for you to sell the home and have enough money to purchase a new home.
Are you comfortable with a growing balance and/or adjustable interest rate?
Usually, when I recommend people do not get a Reverse Mortgage it is because I can sense that they are not comfortable breaking with tradition. We’ve been trained for generations that the goal in life is to pay off our mortgage, throw a big party then give our home to our kids when we die. This mentality makes people feel good to see their mortgage balance decrease by a couple of hundred dollars every month. With a Reverse Mortgage because they are no longer making payments their balance is going to climb a few hundred dollars a month which can cause anxiety every time the statement comes.
Likewise, the last recession exaggerated the risks of Adjustable Interest Rates which is why some choose the Fixed Rate option vs. the Line of Credit which has an Adjustable Rate. They don’t like the possibility that their interest rate could adjust once a year even though it would never affect the other terms of their HECM.
Divorce, Assisted Living, Compelled to Move
A primary requirement of the Reverse Mortgage is that it must remain the primary residence of at least one of the people on the mortgage. Things like Divorce, going into a permanent assisted living facility, or feeling compelled to leave the home for any other reason are all unknowns that could ruin any best-laid plans.
My Recommendations
Don’t waste your life worried and stressed about things that are outside of your control. The point of a Reverse Mortgage is to provide financial security and peace of mind. If you still have too many questions about your future and can’t properly line up a Reverse Mortgage with your specific needs and goals it’s probably best to wait a few more years and re-visit it at that point.
Please, please seek out a true Reverse Mortgage Specialist to help you look at your situation. Someone who cares more about your future than their own commission. A great Reverse Mortgage Specialist will take time to truly consult you, will help you foresee the future, and above all else will put your interests above their own. These are some of the rules that govern my practice and I would love to help you or someone you love to navigate the many intricacies of a HECM Reverse Mortgage.
Trevor Carlson
President – Reverse Mortgage Specialist
Heritage Reverse Mortgage
435-359-9000
www.heritagereversemortgage.com
Heritage NMLS #1497455 Trevor’s NMLS #: 267962