Negatives of a Reverse Mortgage

Save

A reverse mortgage is a financial instrument that provides for a lump sum payment to a homeowner based on accumulated equity in the property. For many seniors age 62 and over who have substantial equity in their homes, the idea has appeal. To be able to live out your life in your home and not make mortgage payments is alluring. However, with the positive prospects of reverse mortgages come some negatives as well.

High Costs Upfront

  • Lenders make money on conventional mortgages and reverse mortgages in similar ways. They charge interest. They charge points. They charge origination and other fees. Interest rates vary as markets vary. Because reverse mortgages are issued to older individuals, lenders weigh the costs in their favor when they initiate the mortgage. With reverse mortgages, closing costs tend to be high and are due when the loan begins. What this means to you, the borrower, is that if there is the likelihood you may vacate the property within a few years after taking out the reverse mortgage, you could be at a disadvantage. You may not have received enough funds to offset the substantial costs of initiating the loan.

Mortgage Insurance

  • When you open a conventional mortgage, you are usually expected to make a down payment of 20 percent or more of the purchase price. If you do not have the minimum down payment and the lender qualifies you for the loan, you will likely have to pay mortgage insurance. This insurance protects the lender in case you default on the loan. With a reverse mortgage, the risk of default does not exist. Other potential risks do exist for the lender, so having the borrower pay for mortgage insurance with a reverse mortgage is a common practice. It guarantees repayment in full to the lender if the value of the property decreases or if the mortgage is held so long that the accrued interest is greater than the home’s value.

Taxes, Upkeep and Homeowner's Insurance

  • In addition to mortgage insurance, the borrower is likely to be responsible for paying real estate taxes, homeowner's insurance and all home maintenance and repair costs, just as you would with a conventional mortgage. These costs do not go away.

High Equity Required

  • To qualify for a reverse mortgage, you must have substantial equity in your home. Lenders offer a percentage of the value of your home, depending on the program and your age. Like any other refinance option, when you open a reverse mortgage, it must first pay off any existing mortgages against the property. If there is not enough equity in your home to meet the requirements, you will not qualify.

Complexity of Product

  • A reverse mortgage is a complex product that is not necessarily suitable for every homeowner. You should review the loan structure with great care. Understand how payments are made, how costs are charged and what the ramifications are of opening the loan, maintaining the loan, vacating the property for any length of time and exiting the loan. A qualified financial counselor can help you make a cost benefit analysis to determine whether the product is suitable for you.

Related Searches

References

  • Photo Credit couple image by Natalia Pavlova from Fotolia.com
Promoted By Zergnet

Comments

You May Also Like

  • Pros & Cons of Reverse Mortgages

    For some senior citizens, especially those on fixed incomes, the cost of living is beyond their ability to afford. When prices continue...

  • What Is Reverse Mortgage Insurance?

    A reverse mortgage provides you with monthly payments based on the equity in your home. The outstanding loan balance increases each time...

  • What Is Reverse Positive Pay?

    Positive pay and reverse positive pay are systems used by businesses to eliminate check fraud. These plans are designed to stop thieves...

  • State Laws on Reverse Mortgages

    Many lenders today offer reverse mortgage loans to seniors. These special loans allow individuals to convert their equity in a home into...

Related Searches

Check It Out

4 Credit Myths That Are Absolutely False

M
Is DIY in your DNA? Become part of our maker community.
Submit Your Work!