Reverse Mortgage Disadvantages
At a time when many Baby Boomers are approaching their retirement years with grave concerns over their income sources, the late night pitches for reverse mortgages may look quite appealing to some. As with any financial strategy, especially those that involve the equity in your home, they should be carefully weighed against your needs, concerns, and priorities. For the right situation, reverse mortgages may have their advantages. But, the disadvantages are many, so, with the limited space available for this article, they are covered here.
Five Disadvantages of Reverse Mortgages
They Increase Debt
Many people hope to reach retirement unencumbered by debt, including a home mortgage. It can be very disconcerting to some when they realize they create a mountain of debt. After years of paying down their mortgage, they are now adding debt to a new mortgage.
They aren’t Inexpensive
It’s a mortgage, and like any other, it comes loaded with fees including closing costs and all the other costs associated with establishing a mortgage. Some studies have revealed that reverse mortgage costs are substantially higher than regular mortgages. The bottom line is that, these costs are deducted from the home’s equity which is what is used to determine the amount of income that will be generated.
They Limit Your Legacy
Perhaps by the time retirees decide they need the income from their home, they may be less concerned with having it available for their heirs as a legacy. Regardless, by establishing a reverse mortgage, the lender has the first lien. If the home can be sold with proceeds available to pay down the reverse mortgage and selling costs, then, at least, there will be something to pass on to heirs. It may be possible to have the mortgage refinanced; however, it would depend on the interest rate climate and the credit worthiness of the heirs.
They can be a Financial Assistance Disqualifier
Income from a reverse mortgage may be a disqualifier if federal or state assistance is being received or is required in the future. This would most likely affect any assistance through Medicaid; however, it shouldn’t have any impact on Social Security or Medicare.
Forget Moving Plans
For the most part, a reverse mortgage locks you into your home. After all, it is the collateral used by your lender to secure the loan. If, you have always intended to stay in the home, then it may not be an issue. While it is possible to sell your home, a significant part of the proceeds are consumed by the interest costs and closing costs leaving you with much less than you expect from the sale.
Unquestionably, reverse mortgages can be beneficial in certain situations, and no one can be faulted with wanting to benefit from an asset that took decades to pay for. But, many people fail to thoroughly consider the consequences of reverse mortgages, and once they are established, they are not easily reversed.