Disadvantages Of Reverse Mortgages

If you have read anything about reverse mortgages, you know that they seem to be too good to be true. You can borrow money, but not have to make monthly payments. There has got to be a catch. If they are so good, what are the disadvantages of reverse mortgages?

First, reverse mortgages are true and real. You actually borrow money and receive the loan proceeds in a lump sum or you receive a portion of the loan proceeds each month. But you do not have to repay the loan in monthly payments like a normal mortgage loan. Rather, the reverse mortgage loan is paid back when you no longer live in your home. As long as you live in your home, the reverse mortgage lender cannot foreclose, even if your total debt exceeds the value of your home.

The greatest disadvantage of a reverse mortgage is that once you have used the money that you borrowed, the money is gone and you probably will not be able to borrow any more money using your home as collateral. Reverse mortgage lenders determine the maximum amount that they will loan to you by looking at the value of your home, your life expectancy, and the projected interest rate. Once you have borrowed the maximum amount of money, your mortgage lender will not loan you any additional money unless the value of your home has increased.

Also, because of the way reverse mortgages are legally set up, you will not be able to borrow any additional money from another mortgage lender even under a normal mortgage loan.

So, while you do not need to worry about foreclosure, you do need to realize that once you have spent the money that you have borrowed with a reverse mortgage, you will probably not be able to borrow any more money with a mortgage loan.

Another disadvantage of reverse mortgages is that they can restrict or limit the ability of people to move to another home. For most people to move to a new home, they have to sell their existing home and use the sales proceeds to pay for the new home.

A normal mortgage loan generally isn't a problem because as people make their payments, their equity in their home goes up. This means that they receive more from the sale of the existing home after paying off their mortgage. They then use that money towards the new home.

With a reverse mortgage, because there are not any monthly mortgage payments, the total debt keeps increasing and the equity keeps decreasing. This means that there is a larger mortgage to pay off and there is less money to receive from the sale. And because there is less money received from the sale, there is less money to apply to a new home.

A third disadvantage of a reverse mortgage is that it will reduce the amount of money that your heirs will inherit by virtue of your home. Because, you do not need to make monthly payments, your debt on your home keeps increasing. When you die, the debt must be paid (normally from the sale of your home). Since the mortgage debt keeps going up over time, the equity (the money that your heirs would receive from the sale of your home after the mortgage debt has been paid) keeps going down. This means that as time passes, your heirs will receive less from the sale of your home.

This is general information only. If you have any questions about reverse mortgages, talk with a mortgage lender, and if you have any legal questions, talk with a lawyer licensed in your state.

Stop! Wouldn't you like to know if a reverse mortgage is right for you? Get more information here on a Reverse Mortgage. And click here for more insights on How Does A Reverse Mortgage Work.

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