Disadvantages Of A Reverse Mortgage

When famous celebrities appear in television ads touting the financial benefits of reverse mortgages, they generally hint that they are the greatest thing since pockets on a shirt.

However, they rarely discuss the disadvantages of a reverse mortgage and some of the pitfalls associated with these loans. While the prospect of receiving what amounts to a home equity loan without having to pay it back sounds good on paper, there are a couple things of which interested parties need to be aware.

Although the concept of reverse mortgages is not new, it was not fully embraced by the financial world until recently, and even then information was sketchy at best. Forgetting about disadvantages of  reverse mortgages, the plan is actually quite simple. Persons over the age of 62 who own their home outright or have a very low loan balance can receive a reverse mortgage based on a percentage of the equity of their home. They can remain living in the home until they pass away or move out. At this time, the home is sold by the mortgage holder and the loan is repaid.

If the home sells for more than the loan amount due, the profit becomes part of the previous-owners estate or is given to the owners if they are still living. If the selling amount is less than the amount of the loan due, insurance provided by the Federal Housing Authority reimburses the lender. Before considering this type of loan, look at the disadvantages of a reverse mortgage.

Surviving Heirs May Be Disappointed

With many older families, they own their home and plan to leave the house, or at least the proceeds from its sale to their children. One of the disadvantages of a reverse mortgage is they money they receive will be deducted from the sale price of the home, essentially allowing them to spend their children's inheritance. They can also the money from the loan in a lump sum payment, a fixed line of credit or in annuity payments.

Families will need to track the amount of money used in lines of credit and annuity payments so they know when they are getting closed to limit. One of the most often complained about disadvantages of  reverse mortgages, are the costs and fees associated with the mortgage. Many who have been interested in a reverse mortgage have changed their mind when they learn how much of their equity will go to paying for processing the loan.