Negative Aspects of a Reverse Mortgage.

For US citizens over the age of 62, a reverse mortgage loan allows them to cash out on their homes. You can borrow against the equity and still be the owner of your house. The lender provides cash to the owner on a recurring basis on in lump-sum. Unlike the conventional mortgages, there is no payment involved. The interest is accrued over the life-time of the loan. The principal and interest is repaid when the owner dies or the house is sold. Thus, the loan taker will never actually have to repay the loan. Thus, it seems like a very good option to increase your retirement income.
However, they are surely not for everyone. If you plan to move or you already have debt on your home, this scheme is a sure no for you. It is good for only those who plan to stay in their house permanently. All the mortgage companies will tell you the benefits of a reverse mortgage. No one will talk of the downside. So, let us do it. Let us look at some of the negative aspects of a reverse mortgage.
High Fees and Closing Costs –
When you take a reverse mortgage from mortgage companies, there is a high fees charged to it. The typical cost that needs to be paid is approximately 10% of your equity which is outrageous. You actually get less money than you house’s worth. The plans charge high originating fees as well as closing costs. Some plan also charge insurance premiums and servicing fees. Even if you finance these costs, they will add to your loan amount.
High Rates –
The traditional mortgage charges are 5% to 7%, but the reverse mortgage charges are even higher. Imagine paying not only huge up-front costs, but an interest rate of 9% as well. The interest is added to the loan balance and the total interest you owe is very high. You are already giving the lender your equity and they charge more to it by way of costs and interest.
Fewer Assets for Heirs –
For many people, their home is a proud earned asset. They plan to gift it to their heirs. Giving it to a mortgage company is just not it. By taking a reverse mortgage you simply lock your asset. Your home will not be debt-free for your heir. In case your family wishes to live in this house, they will have a huge debt on their head.
You Lose in Case You Move –
In case you have to move out of the house within a few years because of illness or any other reason, then your reverse mortgage loan would turn out to be a bad deal. The closing costs are so high, you eventually lose rather than gain.
Ineligible for Low-Income Assistance –
If you take a reverse mortgage loan, you may not be eligible for the low-income assistance like Medicaid from the Federal Government.
Thus, before loaning out your house on a reverse mortgage scheme, look at its pros and cons to take an informed decision. Also, explore various other alternatives. You might actually find something more cheap and feasible, so that your home can be yours forever.