Reverse Mortgage Pitfalls
If you are wondering if there are any reverse mortgage pitfalls, you are certainly not alone. On the face of it, a loan of this type seems the ideal solution to the older houseowner. But people in this age bracket are wise enough to know that there is no such thing as a free lunch.
Here we look at the potential downsides and how you can overcome them.
A reverse mortgage is ideal for a homeowner that has a lot of equity in their home or has completely paid off their mortgage. It can provide a monthly income or lump sum that is tax-free. And best of all, it does not require any repayments while you are still living in the house.
The first pitfall to consider is the reduced amount of equity that is passed onto children or heirs. Because there are no repayments being made on the loan, when the homeowner sells the house, moves out or dies the loan needs to be repaid. Let's take the example that the homeowner passes away. Instead of the children inheriting a mortgage free property, your estate will have a liability to repay the loan. The children may be able to repay this out of their own funds but it maybe necessary to sell the house to repay the loan.
The second disadvantage of a reverse mortgage is that they can be more expensive than a normal mortgage. Before taking on a mortgage you need to look very carefully at the fees that are charged to arrange the loan and also the interest rate. This can all eat into the equity that you have in your home. The good news is that the repayment of a reverse mortgage can never exceed that of the value of the home or the sale price.
Another aspect that needs to be scrutinized is whether the lender takes any percentage of the equity in a property. This can be important if there is a significant rise in the property value. This is one of the pitfalls of a reverse mortgage that may only become apparent when it is time to repay the loan and the repayments are higher than anticipated.
Although reverse mortgages are a very useful vehicle for utilizing the equity in your home, you need to go into them with your eyes open. Make sure that you have a counseling session with a HUD-approved housing counselor before making a decision. Reverse mortgage pitfalls can be avoided if you are properly prepared.