Reverse mortgages are advertised as the universal panacea for cash-strapped persons over the age of 62. Instead of you making payments towards your home, you receive payments for as long as you live there from your lender instead. The idea is to allow senior citizens access to their home equity tax-free while they are living. If this seems too good to be true, it is because there are strings attached to it. The concept gives senior citizens more options besides re-mortgaging, but there are many disadvantages of a reverse mortgage that must be considered before making this decision.
Loss of ownership and control
After all the encumbrances on your home are settled, and as soon as you receive the first payment, you no longer hold the title to your home. By liquidating your asset, you are selling your home to the lender. Every payment the lender makes is one payment closer to purchasing the home from you. The only upside to this is that under the terms of this mortgage, the lender cannot claim payment as long as you live in the home.
Home equity is reduced
One of the obvious disadvantages of reverse mortgages is that it reduces the equity of your home, although lenders ensure that you have a certain amount of home equity before issuing the loan. How much it reduces the equity depends on the type of loan that you take – fixed rate or adjustable for instance. Although a reverse mortgage pays you, the lender expects to be repaid later on – whether you sell the house, they sell the house or you decide to settle the outstanding balance if you decide to move.
Reverse mortgages are ultimately more expensive than remortgaging options
Reverse mortgage lenders have to compensate themselves for the additional risk that you might live longer than the average life expectancy. This means that they would likely have to wait even longer to receive a loan settlement. Therefore, the interest rate on the payments is higher. In addition, the homeowner is still responsible for property taxes, costs of home maintenance and mortgage insurance premiums. Then, the lender fees also have to be paid. These include monthly lender fees, application fees and closing costs.
Reverse mortgage income might affect your eligibility for state assistance
Many countries offer Senior Citizen grants based on the amount of income that a senior citizens receives. In the United States, participation in programs like Medicaid and receipt of Supplemental Social Security Income is contingent on income levels. Reverse mortgage payments are considered income and can put senior citizens over the stipulated thresholds for participation in such programs.
Reverse mortgages are prejudicial to beneficiaries
If you want to leave your property for beneficiaries, a reverse mortgage can make it difficult or impossible to transfer rights to your property when you pass away. This is because the lender is entitled to seek repayment of the money that you received while living. Even when you are living, you cannot sell or rent the home as long as you have the reverse mortgage.
Senior citizens who own homes have several options available to them. The reverse mortgage is only one. Other options include remortgaging the home (with the help of a guarantor) and selling the house or property. You can get out of a reverse mortgage, but only if you repay the terms of the loan in full, which might be a problem if you took the loan because you were desperate for cash. While there are advantages to enjoying the benefits of home equity while you are alive, you must ask yourself cogent questions before taking a reverse mortgage – especially if you have dependents or beneficiaries.