Disadvantages of a Reverse Mortgage
If you are going to get a reverse mortgage, you first must know, and be comfortable with, the disadvantages of a reverse mortgage. With a traditional mortgage the borrower pays down the debt over a set term, usually 30 years. Conversely, with a reverse mortgage, the borrower builds up debt while they live in the home.
In addition to building up debt, there can be significant up front costs when brokering a reverse mortgage. If you plan on only taking out a small portion of money or plan on living in your home for only a short time then these costs can push the effective rate on the home up considerably.
The last significant disadvantage of a reverse mortgage is that you leave your heirs with a noticeably smaller legacy. It might be something you should discuss with your heirs. When you take out a reverse mortgage, you will have less equity in the home and likewise, the heirs will inherit a smaller portion of the home’s value. Also, the longer you live in the home, the more the interest builds up, which further lessens the equity you have in the home.
What are my current financial needs?
Everyone, no matter the age, needs to assess their budget and the best ways to effectively manage their financial needs. The easiest way to do so is by going through last month’s (or any average month’s) bills. You should include everything you regularly spend money on. Where are the bulk of your expenses? Do you need to adjust your budget?
CAN I adjust my budget?
This will vary from person to person and household to household. There are many ways to cut down your expenses such as different grocery stores, paring down unused or unnecessary things, going out to eat, having premium cable, club memberships, etc… If you are unwilling to sacrifice some of those things that you’ve become accustomed to, how much more money will you need?
It would be wise to consider for how long the equity in your home can satisfy your budget.
Am I willing to move?
Importantly, there are other options for increasing cash flow other than a reverse mortgage. Moving is the most common of those options. It can be very hard to think of leaving the home you worked so hard for or raised your children in, but sometimes moving is inevitable. With the proceeds, you can decide to rent a home or purchase a smaller home. Maybe a condo or townhouse is appropriate. Many seniors need to evaluate whether their current home is a suitable living environment. Getting around can be difficult as you age and a large home may not be the right choice for you. Selling your home is an excellent option if assisted living is a near-term possibility.
No matter what the decision is, those interested in reverse mortgages need to gage their current home situation and decide whether moving is a better option for them.
What do I plan to gain from a Reverse Mortgage and is this realistic?
This is an important question to ask yourself. You need to find your own motives for wanting a significant influx of cash. There are significant advantages and disadvantages of reverse mortgages. You have probably already decided how you would want to spend the money, whether it’s to pay bills, meet monthly expenses, or remodel the kitchen, but it is very important to realize the interest you will be accruing. When you ask yourself this question, you should find your true motives and whether other options should be examined.
If you are comfortable with the disadvantages of a reverse mortgage, you should speak with a reverse mortgage lender to discuss your specific situation.
Reverse Mortgage Page does not shy away from the disadvantages of a reverse mortgage. They are important to understand.