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June 3, 2020
For many people, a Reverse Mortgage is a good way to increase financial well-being in retirement – positively affecting quality of life. And while there are numerous benefits to the product, there are some drawbacks — Reverse Mortgage disadvantages.Reverse Mortgages are providing improved financial security, a better lifestyle and real financial relief to thousands of older Americans. However, there are some downsides…
High Fees: The upfront fees (closing and insurance costs and origination fees) for a Reverse Mortgage are considered by many to be somewhat high – marginally higher than the costs charged for refinancing for example. Additionally, FHA program changes in Oct-2017 increased closing costs for some, but ongoing servicing costs to hold the loan decreased for all.
However, the fees can be financed by the Reverse Mortgage itself so there are options to avoid “out of pocket” expenses at closing.
For more information on the fees charged on Reverse Mortgages, consult the Reverse Mortgage rates and fees article.
Accumulating Interest: There are no monthly payments on a Reverse Mortgage. As such, the loan amount – the amount you will eventually have to pay back – grows larger over time. Every month, the amount of interest you will eventually owe increases – it accumulates. However, the amount you owe on the loan will never exceed the value of the home when the loan becomes due.
Most Reverse Mortgage borrowers appreciate that you don’t have to make monthly payments and that all interest and fees are financed into the loan. These features can be seen as Reverse Mortgage disadvantages, but they are also huge advantages for those who want to stay in their home and improve their immediate finances.
And, for those who get the line of credit option but don’t use it right away, the rate at which interest accumulates actually has a benefit — it increases the amount you can borrow when you do need to access it.
Not Enough Cash Can Be Tapped: If you have a lot of home equity, you might be frustrated that a Reverse Mortgage only enables you to use some of it. The HECM loan limit is currently set at $970,800, meaning the amount you can borrow is based on this value even if your home is valued for more. Your actual loan amount is determined by a calculation that uses the appraised value of your home (or the lending limit above, whichever is less), the amount of money you owe on the home, your age, and current interest rates.
Have a higher value home? There are “Jumbo Reverse Mortgage” options available if your house value is greater than the limit listed above.
It Seems Complicated: A Reverse Mortgage is a mortgage in reverse – that can be hard to get your head around. With a traditional mortgage you borrow money up front and pay the loan down over time. A Reverse Mortgage is the opposite – you accumulate the loan over time and pay it all back when you and your spouse (if applicable) are no longer living in the home. Any equity remaining at that time belongs to you or your heirs.
The basics of Reverse Mortgages can seem so foreign to people that it has actually taken many financial advisors and personal finance gurus some time to understand the product. Many experts shunned the product early on thinking that it was a bad deal for seniors – but as they have learned about the details of Reverse Mortgages, experts are now embracing it as a valuable financial planning tool.
The main advantage of Reverse Mortgages is that you can eliminate your traditional mortgage payments and/or access your home equity while still owning and living in your home. Given the right set of circumstances, a Reverse Mortgage can be an ideal way to increase your spending power and financial security in retirement.
Key advantages and benefits of Reverse Mortgages include:
While the following are not strictly disadvantages, it is important to remember that a Reverse Mortgage may not be for everyone, consider the following:
Studies indicate that more than 90 percent of all households who have secured a Reverse Mortgage are extremely happy that they got the loan. People say that they have less stress and feel freer to live the life they want.
Learn more about the fees associated with a Reverse Mortgage or instantly estimate your Reverse Mortgage loan amount with the Reverse Mortgage Calculator.
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