Disadvantages of a Reverse Mortgage

What is Reverse Mortgage?

As the name suggests, Reverse Mortgage (also known as conversion mortgage) is the opposite or mirror image of the convention home mortgage. Here, instead of the borrower repaying the mortgage for the house that he buys, the house subsidizes a mortgage which is paid to the homeowner by a financial institution. To explain it in simpler terms, the homeowner receives a loan on his house and the financial institution gets its money and the interest back when the property is sold once homeowner or the surviving spouse dies.

With the help of Reverse Mortgages, owners who are ‘house rich but cash poor’ can have the luxury of living in their own houses and still meet all their financial obligations. For a homeowner to qualify for a reverse mortgage, he has to be at least 62 years and must have paid of all or most of the home mortgage if any on the house. The factors that are not taken into considerations are the income and medical histories and no medical tests are performed. In some cases, it is mandatory to undergo independent government approved counseling. The amount that can be borrowed depends on:

• Age of the homeowner
• The rate of interest
• Equity of the homeowner in the house
• The value of the house

Both Government agencies and independent financial institutions provide reverse home mortgages. The money to the homeowner can be paid as a lump sum, in equated monthly installments or via a line of credit. A homeowner may even choose to avail a combination of all three modes of payment.

Disadvantages of a Reverse Mortgage

If you are considering a reverse mortgage, then it is very important that you understand as to how the loan works and what your responsibilities and rights are because the investment of your life - your house is at stake here. The disadvantages of a Reverse Mortgage are as follows:

• There are so many options available for Reverse Mortgages, it may end up confusing the homeowner. Counseling is a must if you are considering a reverse mortgage on your house.
• The entire process of availing a home loan is an expensive procedure. The costs include application fees, closing costs, appraisal fees, insurance, credit report fees and in some cases, a monthly service fee. Further even if the Reverse Mortgage allows a homeowner to reside in the comfort of their own house, they are still responsible for all property taxes, repairs and insurance. If these payments are maintained regularly, then the loan may be revoked and the entire loan could become due in full. Although, there is an option of rolling the costs into the loan amount, the cost of a reverse mortgage can be a few thousand dollars more than a conventional mortgage.
• The loan that you avail via reverse mortgage is tax free. However, it may affect your eligibility for federal or state assistance, including Medicaid, Supplemental Social Security Income (SSI) and Medi-Cal benefits. Further, the interest on reverse mortgages is not deductible under income tax only till the loan is paid off in part or fully.
• It is very essential to understand that the money that you will be availing as a loan will be the same that you could have left your children as inheritance. Hence, these mortgages should be availed only in dire consequences or if you have no one to leave your house to.
• It is also important to understand, that to reduce risk and liabilities, mortgage companies evaluate your houses at a cost which is comparatively than its actual cost. You need to weigh out if taking a mortgage will be a better option or will selling your house be a better idea.
• The last piece of advice is for children of parents who are not sound due to old age or diseases like Alzheimer. The concept of owning a lot of money can give a rush and the money may sadly be wasted.

To conclude, reverse mortgages have a long list of disadvantages but have their own advantages too, especially if you do not have dependants and children and want to lead the remaining of your life in luxury. But if you do decide to avail the loan, talk to the counselors and gather all possible information. Discuss the entire deal with your family, friends and if possible a financial advisor too. Weigh out any other better alternatives if available. Make a sound decision that you will not regret. All the best!