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Drawbacks Of A Reverse Mortgage?

Posted By admin || 14-Jul-2010

Drawbacks Of A Reverse Mortgage?Many seniors looking for ways to stretch their dollars, fix debt problems, avoid bankruptcy and enjoy their golden years often consider reverse mortgages which they don't need to repay until after they move or pass away.  But while the benefits of taking out a reverse mortgage include getting immediate access to home equity without the immediate need to repay it, there are a few disadvantages of taking out a reverse mortgage.

  1. Taking out a reverse mortgage only delays the inevitable.  Since the reverse mortgage is not free money and requires a payment after the homeowner sells the home, refinances or passes away, the reverse mortgage is only putting off the inevitability of repaying the debt on the house.
  2. Taking out a reverse mortgage depletes the home of its equity. This can be a disaster if the housing market continues to collapse and the home loses enough value to make the homeowner upside down.  Even though they won't need to pay back the mortgage until some point in the future, if they decide to sell the home, it may be impossible if the home is worth less than the mortgage on the home.
  3. Reverse mortgages are generally more expensive than conventional home mortgages. Because the lender is taking a risk by delaying payment until after the homeowner passes away or moves, they can justify higher interest rates and/or closing costs. This means that in the long run the reverse mortgage will be a lot more expensive for the homeowner and their heirs.
  4. Taking out a reverse mortgage may not solve your financial problems.  Many seniors consider taking out a reverse mortgage because they are hoping that the money will provide them with enough income to pay debts and live out their golden years in relative comfort.  However, reverse mortgages will only be issued on 30 percent to 80 percent of the equity in the home.  For some seniors this might only be as much as $20, 000 or $30,000 if they are lucky; but many others won't get that.  Plus, it is very rare that a senior will receive a reverse mortgage on 80 percent of their home equity.
Categories: Loans / Mortgages
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