10 Drawbacks of a Reverse Mortgage
Taking out a reverse mortgage or Home Equity Conversion Reverse Mortgage is a way for elderly Americans to take advantage of the equity in their home. A reverse mortgage gives you access to tax-free income and can solve a tight budget after retirement. They do come with their downsides, however; you should get to know the drawbacks of a reverse mortgage before making any choices.
Once you sign a reverse mortgage, you cannot change the terms. No refinancing can be very confining for those already on a tight income.
Many who get into reverse mortgages end up surprised down the road. Confusing terms can leave you with a sudden spike in interest rate and significantly higher payments.
High Fees Upfront
Reverse mortgages have a number of high fees right upfront, including mortgage insurance fees and finance fees, lowering the amount received. These fees can be twice those on a refinance.
High Interest Rates
Not only do reverse mortgages have high interest rates, they often also have adjustable. This only adds to the cost you have to carry over the life of the loan.
Risk of Foreclosure
Unexpected hikes in monthly payments are a sure fire way to end up in foreclosure. Getting into a reverse mortgage can run you a higher risk of foreclosure than other financial solutions.
A Burden for Your Children
If you pass away before you have paid off a reverse mortgage, your home goes to the bank. Your heirs may get whatever extra is left over, but they can not claim the home as inheritance unless they pay off the reverse mortgage.
Limited Moving Options
Reverse mortgages require that you live in the home. You will not have the option of moving if you want or need to.
If your spouse is younger than 62 when you sign a reverse mortgage, he or she will not be able to take over the reverse mortgage if you pass away and the home can go into foreclosure.
Nursing Home Restrictions
The inability to move can be dangerous for older people. If you reach a point where you need to go into nursing care, you will need to pay off the reverse mortgage before you can leave your home.
High Ongoing Costs
You will still need to keep up with property taxes and insurance premiums. If you can not qualify for senior tax deferral programs, you may find ongoing costs overwhelming.