Reverse Mortgage Pitfalls

To many senior citizens a reverse mortgage may at first glance appear to be a workable solution for the financial problems they face in their golden years. A reverse mortgage allows homeowners to receive loan proceeds in several different ways and does not require them to pay it back until the home is sold, the homeowner moves out of the home or until after their death. Unfortunately, while there may be some advantages to a reverse mortgage there are numerous reverse mortgage pitfalls as well.

One of the most serious reverse mortgage pitfalls homeowners may face is the size of the debt that must be repaid. The longer the reverse mortgage loan is held, the more money must be repaid. This is exactly the opposite of any other type of mortgage loan; where the size of the debt is reduced over time. Due to the fact that no payments are being made during the term of a reverse mortgage loan, and interest is steadily accruing; the size of the debt grows each and every day. This means that when the time comes to repay the reverse mortgage debt, for whatever reason, it may be difficult to come up with the money to repay the loan. This is just one of the many disadvantages of reverse mortgages.

Another disadvantage to reverse mortgage loans is the fact that the homeowner still maintains full ownership of the home and as a result is required to keep up with all insurance and property tax payments. Many reverse mortgage agreements require the homeowner to keep up with these payments or else the loan will become due immediately.

Homeowners who choose to sell their home and thereby repay the reverse mortgage loan are many times faced with the fact that the cost of repaying the loan eats up all money earned from the sale of the home. In most cases, the amount of money owed on the reverse mortgage loan will not exceed the fair market value of the home; nevertheless homeowners may be left with next to nothing in order to fund the purchase of another home.

If the homeowner does not elect to sell their home or move during the course of their lifetime, then their estate will be faced with repaying the mortgage loan. If the reverse mortgage loan has been held for a long time, this may mean that when the house is sold all of the money from the sale of the property must go toward repaying the mortgage. In this case, there will be no money left over for any other estate settlements or to leave as an inheritance to the homeowner’s heirs. All in all, while a reverse mortgage loan may seem to be an answered prayer, there are numerous disadvantages of reverse mortgages that should be fully considered before proceeding.