July 16, 2008
Disadvantages of a Reverse Mortgage: Things You Need to Know
By Igor Buces
There’s a handful of facts to grasp regarding reverse mortgages before choosing to apply for one. In this article, we’ll discuss the principal disadvantages of a reverse mortgage so that you are better prepared when applying for one.
For example, the majority of reverse mortgages have flexible interest rates. The interest rates will vary as the macro economic conditions change. This may be a danger because of the uncertainty that goes with changing rates. Nonetheless, it can also work as an benefit if the interest rates decline once you obtain your reverse mortgage. If this is the case, you’ll get larger payments and/or keep more of the equity in the house.
Anywys, the event that interest rates increase is not as vital because you’re not making any type of monthly payments. Increasing rates only mean that you may not be able to get as much of a monthly payment or that the equity in the house can decrease quicker than you planned.
Since reverse mortgages function by decreasing the equity in the house, you may spend most of the value of the home; leaving very little money left for you and your heirs. Nevertheless, you need to remember that a “non-recourse” clause existing in most reverse mortgages prevents either you or your heirs from owing more money than your home is worth.
Furthermore, since you’re retaining ownership of your house, you’re responsible for the main costs associated with maintaining a house: real estate taxes, utilities, insurance and maintenance.
One of the main disadvantages of a reverse mortgage is that most lenders charge inception fees and other closing costs for a reverse mortgage. Banks may also charge servicing fees during the duration of the reverse mortgage. In addition, the fees charged may vary greatly depending on the lender you choose. However, these costs are previously included in the mortgage and don’t mean an out-of-pocket cost to you.
In addition, the interest rate on a reverse home mortgage is not deductible in your income tax return until the mortgage is paid off (in part or whole.) Still, if you don’t need that money right now, it can be a large amount of cash available to you at the time when you sell your house.
Finally, there’s usually a cheaper answer to your financial concerns (refinancing, credit line, etc.) than obtaining a reverse mortgage. Of course, for some people, the benefits evidently surpass the disadvantages of a reverse mortgage.
Several of the benefits are the possibility of staying in your own home for as long as you decide, maintaining proprietorship of the house and not needing to make any monthly mortgage payments while you live in it.
To ensure you receive the best bargain available and that you get the smallest fees possible, get a reverse home mortgage using a licensed FHA reverse mortgage lender. A good reverse mortgage lender should educate you while saving you thousands of dollars and minimizing the disadvantages of a reverse mortgage in the process.
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