Disadvantages of Reverse Mortgages

Couples above the age of sixty-two have the option of reverse mortgage which allows them to borrow money against home equity. Although some elderly couples have found this as a lucrative option for tax-free monthly income, the fact remains that money borrowed has to be repaid and hence reverse mortgage loans are no exception to this. It is always better to weigh the pros and cons before you take any decision. Although you have heard a lot of people telling you about how convenient reverse mortgage arrangements are, people will seldom tell you about the risks involved in it. So here is all the information that you should know about reverse mortgages…

What Exactly is a Reverse Mortgage and How Does it Work?

Reverse mortgage, also known as reverse-annuity mortgage or home-equity conversion mortgage is an arrangement wherein, a homeowner borrows against the equity in his/her home and receives regular monthly tax-free payments from the lender. However it is only homeowners who are 62 years old or more, who can get a reverse mortgage and thus borrow against equity in their homes without having to sell the home. So basically a reverse mortgage is similar to an annuity wherein the principal and interest are paid with homeowner's equity.

Repayment of Reverse Mortgage Loan

So how exactly and when exactly is the reverse mortgage loan paid? Although the reverse mortgage loan is tax free, it needs to be repaid sometime, right? Well, a reverse mortgage loan needs to be repaid when the borrower (equity owner) dies or sells the home. However at this time, the reverse mortgage loan has to be repaid completely including the interest and the other charges.

What are the Disadvantages of Reverse Mortgage?

Although a reverse mortgage might mean a quick and immediate influx of cash, it should always be considered as a last option. At the end, you end up losing the home and of course there is no guarantee that you will save enough until it is time for repayment. Before you make up your mind about reverse mortgage here are the shortcomings that you should be aware of:

• First and most important thing is that you need to analyze whether the gains of reverse mortgage are worth sacrificing the ownership of your home. Because once you enter into a reverse mortgage agreement, it means that the mortgage company owns your home. Make sure you are aware of this fact before you make up your mind.
• Reverse mortgage is more expensive and you will end up paying much more money at the time of repayment. Reverse mortgage loans are more costly as compared to the other loan options. Reverse mortgage loans are rising-debt loans since the interest accumulates every month and compounds with time.
• Another important thing to remember is that the interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole. So it will not benefit you in terms of tax returns until the repayment of the loan.
• Although the mortgage company practically owns the house, the homeowners officially retain title to their home and are liable for taxes, insurance, fuel, maintenance, and other housing expenses as well.

In spite of the fact that there are several people who find the idea of reverse mortgages as a convenient option after a certain age, there surely are certain drawbacks that should be considered before opting for it.