A reverse mortgage is a retirement tool that can offer substantial benefits for retirees, but like any financial product, they are not immune to criticism. Before taking a reverse mortgage, all borrowers are required to undergo third-party counseling. This measure ensures borrowers fully understand the terms of the loan. As a result of counseling and other transparency efforts, the majority of reverse mortgage borrowers are happy with their choice. In fact, the Consumer Financial Protection Bureau reported that only 1% of consumer complaints they received in 2021 were about reverse mortgages.
Still, misperceptions persist among people who don’t fully understand how reverse mortgages work. And sometimes, those misperceptions lead to confusion and complaints. Here we’ve taken the most common complaints about reverse mortgages and give them some extra context to help you make up your own mind.
Reverse Mortgage Complaint #1: Unfair and Excessive Fees
Taking almost any mortgage comes with a number of fees. That said, some fees and costs associated with a reverse mortgage differ from those for conventional mortgages. In addition to common closing costs like appraisals, borrowers with a home equity conversion mortgage (HECM) pay a mortgage insurance premium (MIP). This premium is due upfront and as a small monthly percentage over the life of the loan. In many cases, reverse mortgages also have an origination fee. These fees often mean taking out a reverse mortgage can be more expensive than their traditional counterparts. However, for many borrowers, the long-term advantages of a reverse mortgage outweigh the cost of the fees.
Whether these fees make the mortgage worth taking is up to the borrower and their financial advisor. However, it’s worth looking at what you get in exchange for the fees before deciding they are too much. For instance, reverse mortgage borrowers:
- Are not required to make monthly mortgage payments. Without a monthly housing bill, many people eliminate the biggest line item on their monthly budget. This allows borrowers to save or increase their cash flow.
- Have multiple options for how and when they receive loan proceeds. Borrowers can reserve a percentage of their available proceeds as a line of credit. A unique feature of a reverse line of credit is that it grows in borrowing power over time.
- Have their mortgage insurance “baked in.” The mortgage insurance premium allows reverse mortgages to have the nonrecourse feature. In other words, though borrowers pay the MIP, its existence allows for peace of mind. Both because they will never owe more than the home’s value, and their loan is guaranteed should something go wrong with their lender.
Reverse Mortgage Complaint #2: You Can’t Take Out Enough Money
The amount of money a borrower can receive from a reverse mortgage is based primarily on their available equity. Other factors like the age of the youngest borrower and current interest rates also figure in. Generally, the higher their equity, the more loan proceeds will be available to the borrower. The U.S Department of Housing and Urban Development also caps the amount any borrower can take with a HECM at $1,089,300 in 2023.
People who feel their available proceeds are inadequate have a unique option. Instead of taking all available proceeds at closing, the borrower can take some or all proceeds as a line of credit. A reverse mortgage line of credit grows over time, so borrowers who leave it alone gain borrowing power over time. This means that, left alone, the proceeds from a reverse mortgage line of credit could exceed the original available principal.
Reverse Mortgage Complaint #3: The Loan Terms are Complicated
Most financial tools and contracts have legal language and terms that can be difficult for people outside of finance to understand. Additionally, reverse mortgages are often less familiar than other more common loans, even to financial planners. However, unlike many other loans, borrower education is required for taking a reverse mortgage. No one can take a reverse mortgage without taking part in third-party counseling. This requirement aims to ensure that, regardless of how complicated or unfamiliar the loan terms are, the borrower understands them.
Reverse Mortgage Complaint #4: The Reverse Mortgage Borrower Is in Danger of Foreclosure
In contrast to conventional mortgages, reverse mortgage borrowers do not need to make a monthly mortgage payment. For this reason, no reverse mortgage borrower faces foreclosure due to missing mortgage payments.
Reverse mortgage borrowers must pay property taxes and other costs associated with owning a home, like insurance and homeowner’s association dues. They are also responsible for maintaining the property and making necessary repairs as they arise. Borrowers who do not uphold these terms are at risk of foreclosure.
A detailed financial assessment by the lender in the loan application process helps ensure borrowers meet their loan terms. Borrowers who may struggle to meet their obligations can have a life expectancy set aside (LESA). This reserve of funds ensures the borrower can cover their property taxes and insurance.
Reverse Mortgage Complaint #5: It Takes Too Long to Get a Reverse Mortgage
The reverse mortgage process includes a loan application, financial assessment, third-party counseling, appraisal, underwriting, approval, and closing. The wait time is not substantially different than any other home loan. However, each reverse mortgage is different and may take more or less time to process. A reverse mortgage takes approximately 30-60 days from start to finish. If time is a concern for you, it is worth discussing it with your loan officer or servicer before starting your application.
It’s also helpful to understand that the process has many moving parts. While your loan officer or broker can make an estimate, much is out of their control. The best way to help your application is to ensure you promptly take care of all the elements in your control. That includes fulfilling the counseling requirement and returning any documents the underwriter requests as quickly as possible.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.
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