Real Estate

Disadvantages of a Reverse Mortgage: Things You Want to Know

Story Published on July 14, 2008 ⋅  Email this Story ⋅  Print this Story ⋅ Post a comment ⋅

There’s a handful of facts to grasp regarding reverse mortgages before choosing to apply for one. In this article, we’ll discuss the principal disadvantages of a reverse mortgage so that you are better prepared when applying for one.

For example, the majority of reverse mortgages have flexible interest rates. The interest rates will vary as the macro economic conditions change. This may be a danger because of the uncertainty that goes with changing rates. Nonetheless, it can also work as an benefit if the interest rates decline once you obtain your reverse mortgage. If this is the case, you’ll get larger payments and/or keep more of the equity in the house.

In addition, the fact that interest rates may go up is not as vital as in a typical mortgage because you are not making monthly payments. Interest rates increasing just mean that you may not be able to get as much of a monthly payment or that the equity in the house may decrease quicker than you imagined.

Since reverse mortgages function by reducing the equity in a house, you can use up most of the equity, leaving little money left for you and your heirs. Nonetheless, you need to keep in mind that a “non-recourse” condition found in most reverse mortgages prevents either your heirs or yourself from owing more cash than your property is sold for.

Moreover, beacuse you’re keeping ownership of your house, you’re accountable for the major expenses related with keeping a house: real estate taxes, insurance, utilities and maintenance.

One of the main disadvantages of a reverse mortgage is that most lenders charge inception fees and other closing costs for a reverse mortgage. Banks may also charge servicing fees during the duration of the reverse mortgage. In addition, the fees charged may vary greatly depending on the lender you choose. However, these costs are previously included in the mortgage and don’t mean an out-of-pocket cost to you.

Also, the interest rate on a reverse home mortgage is not deductible in your income tax returns until the loan is paid off (partially or whole.) Nevertheless, if you do not need that money right now, it can become a large amount at the time when you sell off your house.

Lastly, there is normally a cheaper solution to your financial problems (refinancing, credit line, etc.) than applying for a reverse mortgage. Naturally, for a large number of homeowners, the benefits surely exceed the disadvantages of a reverse mortgage.

Several of the benefits are the chance of remaining in your own home, maintaining proprietorship of it and not having to make any monthly payments while you live in it.

To ensure you receive the best bargain available and that you get the smallest fees possible, get a reverse home mortgage using a licensed FHA reverse mortgage lender. A good reverse mortgage lender should educate you while saving you thousands of dollars and minimizing the disadvantages of a reverse mortgage in the process.

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