Disadvantages of Reverse Mortgages

Posted on September 25, 2014 by ECR Louisville in Banking, Blog, Caregiver Education, Financial Services, Personal Trust & Estate Planning

One of the products gaining some traction in recent years is the reverse mortgage. Reverse mortgages are becoming increasingly popular as retirees look for ways to improve cash flow by tapping into home equity. Since a reverse mortgage is a form of debt, we thought we’d examine them in more detail and look at some of the disadvantages of reverse mortgages.

What is a Reverse Mortgage?

 

Disadvantages of Reverse Mortgages

Basically, a reverse mortgage is a type home equity loan. However, unlike “regular” home equity loans, a reverse mortgage doesn’t require that you have income or particularly good credit (although lenders have the option of checking). With the reverse mortgage, it’s all about the equity in the home. In most cases, you need to have the mortgage mostly paid off to participate.

You receive the money from the loan – you can choose lump sum, regular installments, or line of credit – but you don’t have to make payments on it. Instead, if you want, the loan doesn’t need to be repaid until you move out of your home or die. In most cases, the proceeds from the sale of your home are used to repay the loan.

Because reverse mortgages are aimed at retirees, there are age requirements. In order to qualify for a FHA reverse mortgage, at least one homeowner needs to be 62, although some banks offer non-FHA reverse mortgages to younger seniors. The home should also be your primary residence. Once the home stops acting as your primary residence (including if you move to a long-term care facility), you usually have to start repaying the loan.

Downsides to the Reverse Mortgage

Because reverse mortgages don’t come with income requirements, you will likely pay higher fees and interest on these loans. The amount that you actually receive might be surprisingly low. Reverse mortgages are notoriously expensive.

Another drawback is the fact that you probably won’t be able to leave your home to your heirs. If you want to leave your home to your posterity, a reverse mortgage can effectively put an end to that idea. Once you die, the home either has to be sold to repay the loan, or your heirs have to use your estate to pay off the loan, reducing their inheritance.

Is a Reverse Mortgage a Good Idea?

In many cases, a reverse mortgage isn’t worth it, because of the reasons stated above. If you really feel as though you have no other option and need cash for your retirement expenses, and if a large portion of your net worth is locked up in your home, then a reverse mortgage might be worth considering. But you should be aware of the drawbacks and disadvantages first. Keep in mind that if you do decide on getting a reverse mortgage, you may want to get a FHA reverse mortgage, because with an FHA reverse mortgage there are certain protections, such as the requirement that a lender can’t force repayment of amounts that exceed the market value of the home (so if the house’s value drops, the lender takes the loss).

However, the expense of the reverse mortgage still makes it a dubious source of retirement funding. Additionally, in some cases payment can come due even if you are still living if you no longer meet the residency requirements. That can strain your finances as you try to begin repaying the loan or it may force you to sell the home.

About The Author:

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Miranda

This post was published by Miranda, Guest Blogger for » ReadyForZero. ReadyForZero is a company that helps people get out of debt on their own with a simple and free online tool that can automate and track your debt paydown.

 

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