Reverse Mortgage Disadvantages

Reverse mortgage has become a popular means of raising some extra cash, for people above 62 years or more, who own a house and have no dependents. This kind of mortgage loans allow a house owner to take a loan, based on the value of the house. This kind of loan helps ease the financial problems faced by many senior citizens who are without any financial support. Reverse mortgage loans do look simple and easy, but there are reverse mortgage disadvantages that make it unattractive.

Features of a Reverse Mortgage

A reverse mortgage may look like the reverse of a regular mortgage loan but it is much more complex. Reverse mortgage is not about selling the house, but taking a loan on the house, without giving up the ownership. A reverse mortgage loan is tax-free and the loan is to be repaid after the death of the borrower or the spouse. In case the house is sold, the loan has to be repaid in full with all the interest accrued and other charges attached with the house.

Reverse Mortgage and the Homeowner

The homeowner should obtain the service of a reverse mortgage counselor to prepare the terms and condition of the loan. The borrower can discuss the cost and learn about the different types of reverse mortgage available. The cost of a reverse mortgage loan includes the application fees, closing costs, insurance, credit report fee and some other fees. A reverse mortgage permits the borrower to continue living in the house. The expenses of the house including the taxes, insurance and the repairs and maintenance cost etc., is borne by the house owner. The borrower can avail the mortgage loan in the form of a total lump sum payment, a monthly payment, a line of credit or even in parts of all the three types of payment.

Disadvantages of Reverse Mortgage

1. A reverse mortgage loan is not free:The loan received by the borrower from the lenders is not free as it is secured by the mortgage on the home. A reverse mortgage loan is repaid after the death of the owner or when the house is sold. The lenders are in the business of making profit and they are entitled to the money invested in the house. Though it may take a long time they will eventually get a return on their investment.
2. A reverse mortgage loan reduce the house equity: A reverse mortgage will decrease the equity value of the house. The house equity is the difference between the value of the house and the money owed on the house. A reverse mortgage will enable the owner to tap into just a portion of the house, and not the total value, which values the house much lower than the original price.
3. Reverse mortgages are more expensive:The reverse mortgage company takes risk as the borrower may live for a very long time. He will not be able to realize his investment until the borrower dies or the house is sold. The reverse mortgage lenders have to wait for a long duration, which may go up-to decades, before they earn their returns. They try to make up their investment by charging a higher interest rate or a high closing fee.
4. Unethical Sale People in Reverse Mortgage Business:There are many reverse mortgage people in the market who will use unfair means to make the sales. They will try to influence the borrower's decision with different tactics and the borrower may end up taking a deal which may land the borrower in a soup. A genuine commercial mortgage broker must be considered who will give a decent package without using unethical means.
5. A High Equity to Qualify for a Reverse Mortgage: A reverse mortgage lender will always offer a loan amount which will be much lesser that the original value of the house. The lenders will charge a very high interest with the principle as the recovery time is for a very long period. Also, they will have to consider the age of the borrower and the kind of reverse mortgage home equity loan. The lenders will not extend a reverse mortgage if there is any existing mortgage on the property. If there is any existing mortgage, then the borrower will have to be bring down the existing mortgage to the maximum level by paying cash, where the borrower is eligible for a reverse mortgage.
6. The Final Solution to all the Financial Problems: A reverse mortgage loan will end some day and when it does there will be no other source of income. A regular supply of money can be availed if the borrower opts for the monthly payment option. Though, if the value of the house appreciates very fast in the near future then there might be an option of mortgage refinancing which will help in sustaining the financial needs.

A reverse mortgage may look like an enticing offer and may convince a borrower to be able to enjoy its benefits. However, looking at the various reverse mortgage disadvantages, it is better to seek another opinion before even considering it.