It doesn’t take a lot of effort for anyone to become confused about the financial services that are offered to him or her. And when you throw around the concept of a reverse mortgage, you can almost count on uncertainty and doubt.
If you need a quick reminder about what the reverse mortgage plan is, be sure to visit our website. There, you can read – and watch a video — about what a reverse mortgage is and how it might be beneficial for you and your loved one.
In a recent article, we discussed seven advantages to a reverse mortgage plan and why you might want to consider applying for one. In this article, we are going to talk to you about some of the disadvantages that come alongside having a reverse mortgage that you will want to look out for if you decide that it is a plan you want to utilize.
Disadvantages to Reverse Mortgage
Although there are a lot of amazing benefits you will receive as part of the reverse mortgage, you need to know what some of the disadvantages are, too. Understanding both the upsides and the downsides to this plan is necessary for you to make an informed decision about whether applying for a reverse mortgage is the right move for your family.
Some of the potential disadvantages to a reverse mortgage is:
Getting a reverse mortgage comes with fees and expensive closing costs. These fees can include home appraisal and origination fees. Some of the things that can be brought into the closing costs include credit report fees, courier fees, document preparation fees, recording fees and more. If your heart is set on getting a reverse mortgage, this may not be much of a hindrance. However, each fee has its own cost, meaning you will have to expense for each individually. So, if you’re currently on a fixed income, these expensive costs may not be what’s in your best interest.
It will accumulate interest. The reverse mortgage is a loan, so eventually, it will have to be repaid. An example of repaying this is if you sell your house and use that funding toward paying off the reverse mortgage. However, in the meantime, the amount of money that you will have to pay back will grow over time as a sort of interest. The interest rate for reverse mortgages also tends to be higher than other mortgages — as of June 2021, the lowest fixed interest rate sits at 3.06%. But rest assured, the amount you owe will not surpass your home’s value when the loan is due.
It’s not the easiest concept to understand. You may have a grasp on what a traditional forward mortgage is. Now it’s time to flip what you know. Easier said than done, right? That’s because grasping a reverse mortgage is confusing. Instead of borrowing money and paying the loan down over time, you’re gathering the loan over time and have to pay it back when you no longer live in the house. In fact, these plans are so tricky that some people go into default. According to the FHA, almost 20% of those who have taken out reverse mortgage loans between 2009 and June of 2016 are “expected to go into default because of unpaid taxes or insurance.” If you decide to apply for a reverse mortgage, make sure you are on the same page with your lender about what your expectations are, and what the government’s expectations are. You do not want to be left in the dark with any loans, so this is an important step to take.
Some heirs have reported difficulty when trying to pay the dues. Everyone is susceptible to making mistakes, including lenders. Typically, when some who have tried to pay off the loan balance have run into issues, it is because some lenders have failed to keep records, shared mistaken information, or simply lacked adequate response times.
It can reduce your net worth. Think about the point of the reverse mortgage that we stated earlier. You are receiving your home equity in the form of money, right? So as soon as you spend that money, your house will not hold the same value it did before you received the home equity. In simple terms: the longer you are receiving money from your reverse mortgages, the more your equity will decrease. This, coupled with the increasing interest, will lower your overall net worth.
The payments will never fluctuate. This is both a good thing and a bad thing. On the bright side of it, your payments will never decrease. The amount you receive in the beginning is the amount you will receive until the end. Unfortunately, on the dark side, it also means that your payments will never increase. If you are of ill-health, and you know that your medical expenses will rise in the future, the lack of additional funding from your reverse mortgage can be detrimental. This is because you are still expected to pay off the taxes and upkeep that are associated with your home. Otherwise, you won’t be able to stay in your home. Managing both these mounting costs and an illness will bring you stress and financial burdens that will become too much to handle.
At The Best Senior Services, we pride ourselves in providing seniors with the best tools and resources to stay educated about retirement and finances. That’s why it’s important that we present you with all of the information available about popular plans and products, including reverse mortgages.
Key points to keep in mind regarding a Reverse Mortgage
Just like there are downsides to a reverse mortgage, there are also upsides. Like we discussed in our recent article, some of the great benefits that come with this plan is that you never have to repay the loan as long as you are living in the home as the primary residence, and it helps secure your retirement.
If you have any further questions about reverse mortgages, don’t hesitate to reach out to us today. You can contact us on our website, or call us at 855.979.8277, and we will connect you with a local licensed agent who will address all of your questions and concerns.
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