The Disadvantages of Reverse Mortgages

Before signing a reverse mortgage, fully understand the disadvantages.

For senior homeowners who need money or who want to help their children or grandchildren with some funding, such as for college, there's a unique financial option. A reverse mortgage allows a homeowner convert a portion of the equity in his or her home into cash. A reverse mortgage is a loan that is available as a one-time payment or a stream of payments. The basis for the loan is equity the seniors have built up in their home.

What's the difference between a reverse mortgage and a home equity loan? A reverse mortgage cannot be used unless the borrowers are 62 years of age older. whereas a home equity loan does not have an age requirement. A home equity loan provides checks or a credit card that can be used for an amount up to the equity loan balance. The loan total is provided when the deal is closed. With a reverse mortgage you have the option of monthly payments or as a lump sum. The payment method is different between these two loan types. A home equity loan requires monthly payments over the life of a loan until it is fully paid. A reverse mortgage does not require payments monthly payments. The balance is paid at the end of the mortgage.

Although the reverse mortgage has some advantages, one must also understand the disadvantages.

Not Free

Although you could think of a reverse mortgage as your own money, it isn't free. The bank, which has to wait until you move out of your home or refinance it, want to be paid for the transaction. You will pay interest on the loan and closing costs just as in an ordinary mortgage.

Equity Depletion

As you draw down money against the equity in your home, the equity will be reduced. If you were planning to use that equity for retirement, a reverse mortgage will reduce the available funds. The interest you pay will also reduce the amount of money available to you. In addition, when you die, your heirs will receive less money if you have borrowed against the equity in your home.

Limitations

With a reverse mortgage, you will not be able to get a loan for the full amount of equity in your home. If the value of your house drops substantially, the reverse mortgage lender wants protection that he will get his money back. A reverse mortgage is probably not the answer to all of your financial needs, particularly if you don't have a substantial amount of money accumulated before you stop working.

Public Assistance

If you will be receiving SSI, Medicaid or other benefits, the advances you receive from a reverse mortgage could be considered assets, and you could lose eligibility for public assistance.

How To Do It

If after reviewing the disadvantages of a reverse mortgage, you feel it is a financial transaction that is right for you, you must first get counseling from a local HUD approved counseling service. The purpose of the counseling service is to make sure you fully understand how a reverse mortgage works. After counseling, complete an application form and pick a financial institution to work with. As in the case with a traditional mortgage, there are closing and interest costs.

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