I have seen numerous articles (some of them from my own pen!) with a strongly negative slant towards reverse mortgages, and perhaps an equal number that do nothing but extol their virtues. What I haven’t seen – and would henceforth like to offer here – is a feature that combines both the pros and cons, such that potential borrowers can clearly see the real calculus that underlies the decision to obtain a reverse mortgage.

Lets start with the benefits. First of all, the flow of funds under a reverse mortgage is one-way. In other words, you don’t have to write any checks to your lender. All of the money associated with the origination of the mortgage flows in your direction. This will be an especially welcome development if you obtain a reverse mortgage in order to repay an existing primary mortgage. Of course, you are merely swapping one kind of debt for another, it’s nice to no longer be responsible for making payments to your lender.

In addition, you have a tremendous amount of flexibility in how you receive and use these funds. You can opt to receive a lump-sump payout, monthly check, or a line-of-credit. You can spend the proceeds on anything you want, however, frivolous, and no one will have any legal basis for intervening.

Second, reverse mortgages allow you to continue to live in your home until you pass away, move out, or fail to maintain and pay taxes on the property. Unless one of these conditions is breached, you can happily remain in your home until the day you die. Regardless of any changes in the property value and the balance of your reverse mortgage, the home will remain yours until the lender is justified in calling the mortgage.

In some sense, then, the reverse mortgage represents a bona fide opportunity to have your cake it and eat it too. As long as you honor the terms of your loan, you can tap the equity of your home for any purpose, all the while still enjoying the right to continue to live there, undisturbed.

Of course, any honest sales pitch should also give space to the drawbacks of a reverse mortgage. Namely, they are expensive. To be fair, the FHA (the government agency which insures 95% of all reverse mortgages) strictly regulates these fees, and lenders themselves have been proactive in reducing them when possible. Still, when you consider the reverse mortgage insurance premiums, origination fees, and service-fee-set-aside (SFSA), reverse mortgages are generally more expensive than conventional mortgages. And don’t forget the biggest cost: interest. Because reverse mortgages are negatively amortizing, the interest will continue to accrue (and compound!) until the loan is repaid.

In addition, reverse mortgages have the potential to be abused and obtained for inappropriate reasons. Since it is no one’s responsibility to police how the reverse mortgage funds are used, anecdotal evidence (and human nature) suggests that funds may be spent on frivolous items, such as vacations, new cars, etc. Reverse mortgages were originally conceived to help older borrower repay primary mortgages and tap their home equity to improve their residences. Those who use the funds for other purposes do so at their own financial peril.

The final drawback is that while ‘special,’ a reverse mortgage is still a mortgage. What that means is that if you breach the terms of the contract, the lender can and will foreclose on the property. For example, if the borrower dies or moves out, the lender will recall the loan. Any surviving spouse or family member will not be permitted to continue to reside in the home, unless one of them was also listed as a borrower when the loan was obtained. Also, if the borrower fails to pay property taxes and insurance, and fails to adequately maintain the property, the lender will be justified in recalling the loan.

In short, the reverse mortgage is not a free lunch. You can tap the equity in your home while continuing to live there, but you do so at a price. Understand that trade off, and make your decision accordingly.

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