Reverse Mortgage Disadvantages
When considering a reverse mortgage, one must make a rational decision and review both sides, even the downfalls. There are plenty of benefits, but there is a possibility of disadvantages as well. Applying for a reverse mortgage is a huge step one can make in their life, so taking the time to fully understand every aspect, even the negatives, is necessary. Here are some common reverse mortgage disadvantages:
- If the last surviving owner/borrower passes away, the loan must be repaid before the home’s title can be transferred to the borrower’s heirs.
- Payments may affect Supplemental Security Income and Medicaid payments
- Interest is compounded on reverse mortgage and cannot be deducted from income taxes until it is repaid.
- As the equity decreases in your home with each payment to you, you may not have enough equity left for future needs or for your estate.
- The HECM income ends when your home equity term is reached, you sell your home, your home is not your main principal home for 12 consecutive months, or the last borrower passes away.
- You must pay off the remaining home mortgage with your own money or with proceeds from the reverse mortgage loan at closing.
- Prior to obtaining most reverse mortgages, you need to attend an approved in-person counseling sessions or consumer education classes about reverse mortgages from a nonprofit or public agency engaged in reverse mortgage education.
- In most cases, the home must be sold to pay back the reverse mortgage and there “may not be” any money left for the heirs.
- Usually the interest rate and upfront costs are higher for reverse mortgage than for the traditional mortgage or other equity loan. Upfront fees can add up over time.
- Reverse mortgages’ have variable rates that move up and down with the market conditions.
- Borrower will need to pay interest on the following when these are rolled into the loan: insurance premiums, broker’s fees, closing costs, and service fees.
- The homeowner is still responsible for paying property taxes, paying homeowner’s insurance, and maintaining and repairing the home. If not, your loan becomes due.
Not for everyone, here are a some reverse mortgage drawbacks.
Just like any other Mortgage product a Reverse Mortgage or HECM loan has its benefits and drawbacks. A reverse mortgage, which is a loan against home equity that doesn’t have to be repaid until the owner dies or sells the home. When the homeowner or owners pass away the estate repays the loan, plus interest and fees. The home is typically sold to payoff the loan and the difference between the loan payoff and the amount received from the sale of the home passes to the heirs of the estate.
In situations in which the home was being left to family members or another heir it is important to discuss their intention for the home while considering a reverse mortgage. In some cases children do not want the home or are considering selling the home in the future. Also, in situations where there are no heirs to leave the home to, a reverse mortgage would make more sense. But, in other situations, it is less likely that this is the right product for you. Always be wary of the disadvantages of major financial decisions you may make throughout your life. If you’re interested in further finding out what you might qualify for, check out our calculator for reverse mortgages.