For many qualified seniors, a reverse mortgage is an attractive option to unlock the equity in their primary residence. Reverse mortgages can deliver positive benefits that provide senior homeowners with supplemental income to achieve a comfortable retirement lifestyle. However, there are potential downsides that have discouraged potential borrowers from engaging in the reverse mortgage programs that are currently available.

Fees and Costs

For instance, there are substantial costs involved in originating a reverse mortgage. Such costs include an origination fee (usually a minimum of $2000 or a maximum of 2% of the loan limit), mortgage insurance premiums, document preparation fees, escrow or closing costs, monthly servicing fees, appraisal fees, termite inspection costs, recording costs, title insurance, and other closing costs. Total costs are roughly 5% of the value of the loan amount taken by the borrower.

Interest Rate Charges

Next, the interest rate that is applied to a reverse mortgage loan is usually a variable interest rate based on an index plus a margin, although some reverse mortgage programs may offer a fixed rate.  In either case, fixed or variable, interest charges over the life of the loan can add up and quickly erode the equity held in the home.

New Debt

Furthermore, due to the nature of a Reverse Mortgage loan being a debt instrument, many seniors are loath to take on additional debt. Whether the desire is to leave an asset to their heirs or to avoid passing on a liability, some seniors choose not to utilize the Reverse Mortgage option.

Occupancy Conditions

Finally, many reverse mortgage programs require that the homeowner live in the home as a primary residence.  If, for example, the homeowner doesn’t occupy the residence for a period greater than 365 days, then in many cases the reverse mortgage would become due.