If you are age 62 or older, you may be considering getting a reverse mortgage on your home to help supplement your income, pay off bills or possibly even do some traveling. Initially, the idea of a reverse mortgage may seem very attractive.
You get a guaranteed monthly check and you don’t have to pay the money back until you leave your home. It is not exactly a free ride though. Before you take out a reverse mortgage, you should consider the drawbacks.
What are Reverse Mortgages?
A reverse mortgage is a mortgage that borrows against the equity in your home. For example, if you have fifty percent of your home’s value in equity, you may take out a reverse mortgage in order to receive monthly payments out of this equity.
The money taken out in a reverse loan does not have to be repaid until either the homeowner passes away or sells the home. This can be a tempting prospect, and understandably so.
Reverse mortgage loans are increasingly popular with seniors, who often find themselves facing growing medical bills, short on cash, and unable to earn employment wages.
However, the same loan that many people enter into in order to relieve themselves of impending financial burden often ends up being the cause of the financial disaster. If in any way, you can avoid a reverse mortgage, you should. Here are 10 reasons why:
1. Asset Loss
After 30 years of making mortgage payments, are you sure you want to give your biggest asset back to the bank? What if you encounter serious medical problems and need to move to an assisted living home? If you spend all or most of your equity with a reverse mortgage, you won’t be able to sell your home for enough to pay for the costs of living in a nice facility.
2. Potential Loss of Medicare Benefits
The money you get each month from a reverse mortgage counts as federal income and may or may not reduce your Medicare benefits. Nobody likes to think that they may need to go to a nursing home someday, but you have to consider the possibility it could happen. Taking out a reverse mortgage could affect your Medicare benefits when it comes to nursing home coverage.
3. What About Your Family?
If you want to leave your home to a family member after you pass away, you can’t do it without making them responsible for paying off your reverse mortgage. They may also be responsible for the difference between what you owe and the home’s value. Essentially, if you take out a reverse mortgage, you can’t will the house to any family members without putting them in debt.
4. The Interest Compounds
Reverse mortgage loans or lines of credit accrue interest over time; thereby increasing your debt. Depending on how long you have your reverse mortgage, if you have to leave your home unexpectedly, you may actually end up owing more money than you originally borrowed. Even worse, you may owe more than your home is worth at the time.
5. High Cost to Borrow
Reverse mortgage lenders charge a high loan origination fee, usually thousands of dollars, and closings costs that are even higher than that. They may also charge service fees or mortgage insurance premiums. Getting a reverse mortgage is very expensive. When you look at the combination of interest, fees and other costs, a reverse mortgage may cost more than it’s worth.
In some cases, seniors may have no choice but to get a reverse mortgage if they can’t meet their monthly bills. However, you should explore all your options before you take out a reverse mortgage.
For example, if your financial problems are short term, you may be far better off getting a home equity loan. Even though you may be retired, you’ll likely live for many years after your retirement; before you take out a reverse mortgage make sure you understand all the long term implications.
Just the origination fee alone can equate to six thousand dollars. Add that to the closing costs, servicing fees, appraisal costs, and mortgage insurance premium (MIP) payments and that is one very expensive loan.
7. Negative Impact on Medicare Benefits
. When you take out a reverse mortgage, you effectively increase your monthly income. This income is reported to the Federal government and, as a result, your Medicare benefits could be adjusted accordingly. This is an especially important consideration when it comes to benefits related to nursing home coverage.
8. Variable Rates
Most reverse mortgage loans carry adjustable interest rates, which change when the financial index changes. This equates to a certain level of uncertainty in planning for your financial future.
9. Heir Impact
If you plan on leaving your home to your heirs, then you should know that your reverse mortgage loan will have to be paid in full before the home will be released to your loved ones. This applies even if you owe more than the home is worth, meaning your kids and grandkids may be burdened with investing even more into your home than its value if they want to keep it in the family.
10. Income Tax Deductions
Whereas interest paid is tax deductible with traditional mortgage loans, you are not able to deduct mortgage interest payments on your tax returns when you have a reverse mortgage. This is another way in which your Medicare benefits may be negatively impacted by your technically higher income.
As you can see, reverse mortgage loans come with their own set of risks and disadvantages. Although a reverse mortgage may seem like the most viable option for your circumstances, you should carefully consider these factors before committing. At best, a reverse mortgage should be considered a last resort, and a tough one, at that.