What to Tell Grandma: Disadvantages of Doing a Reverse Mortgage

Disadvantages of a Reverse Mortgage

Don’t be tricked into getting a reverse mortgage.

One of the retirement “tools” being touted right now is the reverse mortgage.

The idea is this: You have put a lot into your home, building up equity.

Now, you can use your home to fund a retirement. With a reverse mortgage, the bank pays you every month (or you can get a lump sum), providing you with income in your retirement.

Of course, the reverse mortgage is actually a loan; it needs to be paid back with interest. However, the reverse mortgage is not paid back until the house is sold.

While reverse mortgages can be tempting, it is important not to jump into one. Carefully consider the disadvantages that can come with a reverse mortgage.

High Fees and Interest

When you get a reverse mortgage, you will pay high fees and high interest. Because your income doesn’t matter, and your credit is practically a non-issue with a reverse mortgage, you will be paying for it. Your reverse mortgage amount is almost entirely dependent on the equity you have in your home. However, this comes with a cost.

Many of the fees charged – from loan origination fees to other costs – are quite high. And the interest rate on a reverse mortgage is also usually rather, especially compared to other home loans based on equity. You will see a huge difference between the equity in your home and the amount of money you actually receive.

What Happens with Your Heirs?

Some people aren’t particularly interested in what assets their heirs end up with, but you might care about what happens to your estate. When you have a reverse mortgage on the home, it has to be repaid when you die.

This means that your home has to be sold in order to repay the loan, or, if they want to keep the home in the family, your heirs will need to come up with the money to pay off the loan. This can significantly reduce the cash your heirs get.

You Might Have to Pay Back the Reverse Mortgage

Unfortunately for you, death is not the only thing that triggers the requirement to repay your reverse mortgage. If you are not living in the home for more than a year, then you have to begin repaying the reverse mortgage – or sell the house. This means that if you have to go into long-term care, you will have to begin making arrangements to repay your reverse mortgage.

Trying to repay the reverse mortgage can also cut into your gains if you decide to sell your home so that you can downsize. If you don’t live in the home until you die, a reverse mortgage can turn into a real problem.

Is the Lender Reputable?

Finally, you have to be on the look out for scams. The Federal Housing Administration approves some lenders for reverse mortgages, and this can limit some of your risk. However, not all lenders are reputable, and reverse mortgages provide all sorts of opportunities for scammers.

You might go to get a reverse mortgage – only to be socked with even higher fees, almost usurious interest, and even be scammed out of the house altogether. Those are some big risks to take.

There are plenty of disadvantages that come with reverse mortgages, and in many cases they should only be used as a last resort. There are plenty of other retirement tools to turn to first.

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Last Edited: May 13, 2013 @ 3:51 pm
2 comments
Ron
Ron

Basically a reverse mortgage is just another way for banks or other "financial entities" to stick it to the elderly. Great post.

There's no such thing as a free lunch!