Major Shortcomings
Reverse mortgages have been criticized for several major shortcomings:
- Possible high up-front costs make reverse mortgages expensive. In the United States, entering into a reverse mortgage will cost approximately the same as a traditional FHA mortgage.
- The interest rate on a reverse mortgage may be higher than on a conventional mortgage.
- Interest compounds over the life of a reverse mortgage, since no monthly payments are made by the borrower on a reverse mortgage, the interest that accrues is treated as a loan advance. Each month, interest is calculated not only on the principal amount received by the borrower, but on the interest previously assessed to the loan. Because of this compound interest, as a reverse mortgage’s length grows, it becomes more likely to deplete the entire equity of the property. However, with an FHA-insured HECM reverse mortgage the borrower can never owe more than the value of the property and cannot pass on any debt from the reverse mortgage to any heirs.
- The sole remedy the lender has is the collateral, not assets in the estate, if applicable.
- Reverse mortgages can be confusing; many obtain them without fully understanding the terms and conditions, I encourage all family members to be present at the mandatory counseling and at the time of application. This way everyone knows how the process works.
Despite these major shortcomings, in a 2006 survey of borrowers by AARP, ninety-three percent said their reverse mortgage had a mostly positive effect on their lives, compared with three percent who said the effect was mostly negative. Some ninety-three percent of borrowers reported that they were satisfied with their experiences with lenders, and ninety-five percent reported that they were satisfied with the counselors that they were required to see.
