Risks And Benefits Of A Reverse Mortgage

Posted on by Forest in Debt, Saving Money & Finances

Risks And Benefits Of A Reverse Mortgage

Reverse mortgages have a bad rep and to be honest I think it’s for a pretty good reason. Although the industry of reverse mortgages has been cleaned up somewhat and it’s a little harder for predatory lenders to bring people in without them fully understanding what they are getting into I still think the downsides need to be considered a lot more.

The basics of a reverse mortgage…

Risks And Benefits Of A Reverse Mortgage

Basically talking with a reverse mortgage you sell a portion of your home to a company. They then give you the cash back in the form of payments enabling you to get some of the equity of your home in hard cash for use now, this sometimes comes as a lump sum, scheduled lump sums or as monthly payments. Generally reverse mortgages are only available to people aged 62 and older, in USA, and is administered by a federal program.

Risks And Benefits Of A Reverse Mortgage

On the side of the benefits there are a few.

You get to use the equity of your home
Payments are not taxed
You can normally spend the cash on whatever you want
Repayment of the loan isn’t normally needed until you move out of the last borrower dies (hopefully the sale of the house will cover the outstanding)

Some of the downsides and risks are not so good!

Set up costs can be quite high
Interest on the loan can be very high
You may be required to stay in the house a certain amount of days per year, not so easy for elders in care.
You are still responsible for all insurance even though the reverse loan company effectively owns part of the property.
Expensive additional insurances may be required.
Undoing a reverse mortgage may be more or less impossible.
Your aires could end up owing on the reverse mortgage.

On further reading I found this article interesting. Reverse Mortgages, do the benefits outweigh the risks?

I don’t like the premise behind a reverse mortgage one bit. It seems like they can cause huge problems for the receivers of your estate and some of the clauses and interest mean that you could lose a significant amount of the equity you worked so hard to build up. Of course the idea is that if you really need some cash you can get to it without moving out, downsizing or whatever other options you have open. You can stay put in your home.

Have you ever undergone a reverse mortgage or have you had to deal with the aftermath of one? I would love to hear your thoughts, opinions or anything you have to say about them.