Disadvantages of a Reverse Mortgage: Things You Want to Know

By Igor Buces in Mortgages on July 14th, 2008

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by Igor Buces

There’s a handful of things to know about reverse mortgages before choosing to get one. In the remaining of the article, we’ll explain the main disadvantages of a reverse mortgage.

For example, most of reverse mortgages have changing rates. The rates will fluctuate as the financial indicators change. This may be a disadvantage because of the uncertainty associated with it. Still, it can also work as an advantage if the interest rates decline once you get your reverse home mortgage. In this case, you’ll get more money.

In addition, the fact that interest rates may go up is not as vital as in a typical mortgage because you are not making monthly payments. Interest rates increasing just mean that you may not be able to get as much of a monthly payment or that the equity in the house may decrease quicker than you imagined.

Since reverse mortgages function by reducing the equity in a house, you can use up most of the equity, leaving little money left for you and your heirs. Nonetheless, you need to keep in mind that a “non-recourse” condition found in most reverse mortgages prevents either your heirs or yourself from owing more cash than your property is sold for.

Furthermore, since you’re retaining ownership of your house, you’re responsible for the main costs associated with maintaining a house: real estate taxes, utilities, insurance and maintenance.

One of the main disadvantages of a reverse mortgage is that most lenders charge inception fees and other closing costs for a reverse mortgage. Banks may also charge servicing fees during the duration of the reverse mortgage. In addition, the fees charged may vary greatly depending on the lender you choose. However, these costs are previously included in the mortgage and don’t mean an out-of-pocket cost to you.

Also, the interest rate on a reverse home mortgage is not deductible in your income tax returns until the loan is paid off (partially or whole.) Nevertheless, if you do not need that money right now, it can become a large amount at the time when you sell off your house.

Finally, there’s usually a cheaper answer to your financial concerns (refinancing, credit line, etc.) than obtaining a reverse mortgage. Of course, for some people, the benefits evidently surpass the disadvantages of a reverse mortgage.

Several of the benefits are the chance of remaining in your own home, maintaining proprietorship of it and not having to make any monthly payments while you live in it.

To make sure you get the best available deal, apply for a reverse mortgage employing a licensed FHA reverse mortgage broker. A professional reverse mortgage broker will advise you while saving you thousands of dollars at the same time and minimizing the disadvantages of a reverse mortgage.

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