4 Major Disadvantages Of Reverse Mortgages

• Posted on March 15, 2010 at 9:17 am

A reverse mortgage can be an attractive option for many home-owning seniors that are having a hard time making ends meet. With a reverse mortgage, a senior homeowner will receive money for their home equity from a lender without having to make repayments for as long as they live in their home. So with the right reverse mortgage a senior homeowner can maintain their standard of living while retaining ownership of their home.

There are many differences that have to be understood between reverse mortgage’s and traditional mortgage loans because if no effort is done , they can cause financial problems for reverse mortgage borrowers.

Disadvantage No.1 – The relative cost of a reverse mortgage. Reverse mortgages tend to be costlier than a conventional mortgage. This is due to the rising-debt nature of reverse mortgages. A typical reverse mortgage may provide a homeowner with a 300 per month payment with a yearly interest rate of 12 percent compounded monthly. Over the course of ten years, the homeowner will rec
eive 36,000 in payments, but will owe almost 70,000-almosttwice as much as received.

Disadvantage No.2 – The complex and confusing contracts of reverse mortgages, that can have a tremendous impact on the overall cost of a reverse mortgage to the borrower. Due to the complexities in the written contract, this often allow lenders and third parties involved in arranging reverse mortgages to not fully disclose the loan’s terms or fees.

These numerous other front-end and/or back-end fees can also quickly drive up the cost of a reverse mortgage. These fees include origination fees, points, servicing fees, mortgage insurance premiums, closing costs, shared equity and shared appreciation fees.

Out of all these fees, the shared equity and appreciation fees should be avoided, it can raise the cost of the mortgage without providing any benefit to the borrowers. As an example, a shared appreciation fee can give a lender an automatic 50% interest in the difference between the current value of the home when the loan is signed and the appreciated value of the home when the loan is terminated. What makes the fees unfair is the fees have no relation to the amount that is borrowed.

Disadvantage No.3 – The reverse mortgage payments can affect eligibility for supplemental Social Security income, old age pensions or Medicaid

Senior’s may not even realize this problem until after they already have their reverse mortgage, and only then do they find out that this can have the opposite affect on a seniors finances then what they were trying to accomplish in the first place by taking out the reverse mortgage.

Disadvantage No.4 – The fact that reverse mortgages reduce the value of a senior’s assets and estate. This will largely affect the amount that will be given to the borrower’s heirs when they depart.

• Comment on 4 Major Disadvantages Of Reverse Mortgages
• Filed under
  • Mortgage Types