Downfalls to a Reverse Mortgage Loan
23 Nov, 2017 / By Jennifer Hamilton
One retirement planning resource that has begun to gain a significant amount of interest in the past couple of years is the reverse mortgage. For plenty of retirees it can seem like a savvy financial move. You are able to gain access to your house’s equity, at which time the bank will actually make mortgage payments to you. Essentially, a reverse mortgage will turn your home into an income source. As nice of a thought as this is, the truth about getting a reverse mortgage is far from being ideal. In truth, there are several reasons why you should avoid reverse mortgages all together, especially as a component of your retirement plan. The reasons for this generally revolve around the fact that a reverse mortgage is really an overly glorified loan against your house’s equity that will have to be repaid. Here are seven reasons why you should avoid a reverse mortgage all together.
The Fees are Substantial
Due to the fact that reverse mortgages are essentially loans, you will have to deal with loan related fees. This includes origination fees, as well as other fees that are typically quite hefty. A reverse income is a type of home equity loan, one that isn’t decided from your credit score or your income. Due to this, lenders have to take on a larger risk, which are typically offset through higher than normal fees.
High Interest Rate
Reverse mortgages typically come with a high interest rate, usually one that is much higher than that of a traditional home equity loan. When adding both the reverse mortgage itself, as well as the fees that are tacked on and the high interest rate, you will probably be pretty surprised by how small the amount of money you actually end up with is. Although it is your own equity, the bank will end up with a large amount of it.
Your Heirs May Not End Up With the Home
When you obtain a reverse mortgage, you aren’t obliged to make any payments on the loan. On the other hand, the loan is to be paid off when you put your house on sale. This means that if you pass away, the home is expected to be sold in order for the loan amount to be properly covered. This means that any heirs will not have access to your home. However, it is possible for heirs to gain access to the home if they are able to pay off the reverse mortgage after you pass away. This typically means that money has to come out of your estate, which will reduce the total amount that your grandchildren and children will receive upon your death. For those who are wishing to leave behind a large legacy, this can end up being a huge drawback.
You Must Repay the Loan Once You Move Out
Passing away isn’t the only way that repaying a reverse mortgage will be triggered. To avoid having to make payments on the loan, it is typical that you must be residing the majority of your time in your family’s primary residence. You will be considered moved out if you have not lived there in more than a year. This will include if you must go into a long-term care facility. If, for whatever reason, you aren’t able to remain in your house, but haven’t passed away, you will be obliged to repay your reverse mortgage. The chances of this coming when money is already tight are relatively high, and so it can put a great strain on your financial health.
You Are Still Held Responsible for House Costs
Throughout all of this you will still be deemed responsible for all of your house expenses. This means that you must pay the taxes on your property, as well as maintain homeowners insurance, and ensure that regular maintenance is paid for. If you do have enough equity, you may receive a reverse mortgage that is high enough in order to cover all of these expenses, however it can be a tricky situation anyhow.
Line of Equity May Be The Better Option
You may find that getting a line of equity is the better option for your financial situation. This will come with fewer fees than a reverse mortgage. Additionally, a line of equity is available to you in the exact amount that you need. However, keep in mind that it typically does require a monthly payment.
Refinancing May Be a Better Option
The more traditional method of refinancing your house using a conventional mortgage could be the better option for you as well. This method can save you a substantial amount in mortgage insurance fees that reverse mortgages otherwise typically require of you. However, like lines of equity, this method also requires a monthly payment.