Reverse Mortgage Disadvantages
November 28, 2009
Reverse mortgages were the topic of a post several weeks ago in which we promised to take a look at the downsides of seniors using a reverse mortgage in retirement. Here are some of the disadvantages of using a reverse mortgage to borrow against the equity in a home.
Builds up Debt
Traditional mortgages allow you to purchase a home using financing. As you make monthly payments on the mortgage, you start to pay down on the principal balance you owe. Over time, this decreases your debt amount. A reverse mortgage, however, is the direct opposite. It takes a home that you own free and clear of any debts and creates a new debt on the home.
Significant Upfront Costs
All mortgages have some types of fees and costs associated with establishing them. Most reverse mortgage adversaries claim that the fees and costs of establishing a reverse mortgage are significantly higher. Since many retirees establish a reverse mortgage to provide them with more income, having to pay what potentially adds up to thousands of dollars to establish a reverse mortgage may negate the benefits of the intended purpose of a reverse mortgage.
Decreases Assets to Heirs
If you have children, grandchildren or others you want to leave your assets to, a reverse mortgage may not be for you. A reverse mortgage decreases the amount of equity you have in your home, which directly affects the overall value of your estate. A reverse mortgage does not remove the possibility of leaving your home to your heirs, but your heirs are left with the responsibility of refinancing or paying off the reverse mortgage debt. The other option is for them to sell the home, pay off the existing reverse mortgage debt, assuming they can sell the home for at least the amount owed.
Can Make You Ineligible for Low-Income Assistance
Income from a reverse mortgage can affect your eligibility to receive low-income assistance from the federal or state government such as Medicaid. Check with the agency you’re receiving support from to see if the income from a reverse mortgage may adversely affect this income. Generally, this does not apply to Social Security income and Medicare coverage, but if you receive other types of income, make sure you’ll continue to receive this money if you take out a reverse mortgage.
Restricts Options to Move
A reverse mortgage uses your home as collateral for the mortgage. Since a reverse mortgage requires the home is your primary residence, this restricts your ability to move out of the home while you have a reverse mortgage. Reverse mortgages used as a short-term loan option may end up costing you more than you gain. With the high upfront closing costs, if you move out of the home soon after establishing a reverse mortgage, then you typically do not recoup the upfront costs–meaning you’re losing more than you’re gaining.
Can reverse mortgages be beneficial? Yes. Can reverse mortgages leave you with disadvantages that outweigh the advantages? Absolutely. Be sure to consider the disadvantages of a reverse mortgage carefully before choosing to use one as part of a retirement strategy for you or your parents.
Reverse Mortgage Guide
If you want to know more about reverse mortgages you can also check out a report by Quicken Loans, a branch of Intuit (the companies that creates the software products TurboTax, Quicken, and QuickBooks), that goes into much more depth about who reverse mortgages are right for.
The free guide answers covers topics and questions such as who qualifies for a reverse mortgage, the different types of reverse mortgage options, how a reverse mortgage works, and how much money you can get. Get the free report
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