Reverse Mortgage Pitfalls and Disadvantages

When it comes to reverse mortgages there are reverse mortgage pitfalls that you must be aware of.

If not, you are risking losing a sizable amount of money in the transaction if it is not done properly…for your benefit…as opposed to the benefit of the mortgage company.

This is one of the problems with a reverse mortgage.

Before discussing reverse mortgage pitfalls, let me give you a brief explanation of what a reverse mortgage actually is.

What Is A Reverse Mortgage?

A reverse mortgage is used by people who are equity-rich but cash-poor and wish to utilize the equity in their home to stay in their home. The bank will make a payment to you, either a lump sum or scheduled installments, and then when you no longer live in the home the mortgage is paid back.

It sounds simple enough, but there are reverse mortgage pitfalls that you must know about before you make the decision to go ahead with the mortgage.

Reverse Mortgage Pitfalls To Avoid

Excessive Fees

The first of the reverse mortgage pitfalls I have to go over with you are the excessive fees, because this can be a big disadvantage of reverse mortgages.

reverse mortgage pitfalls

These fees are high because the lender is taking a big risk…if you live to be 95 years old and you take the loan out at 64, they are waiting for their money for 31 years.

For this reason a reverse mortgage lender will either get a higher rate of interest when the loan is finally repaid or they change excessive levels of fees in order to build in a profit earlier for themselves.

It is one of the dangers of reverse mortgages that is not always discussed by the lender so you need to be aware of this.

And even though some origination fees have been capped at $6,000 per loan, you will pay standard closing fees as well as mortgage insurance premium fees, which could be as high as 2% of the value of the house (not the value of the loan) plus a monthly servicing fee for the mortgage insurance and the mandatory $125 fee for the mortgage credit counseling.

Overall, the fees make sense only if you are going to be in the house a long time. If you will be moving soon, then the fees are a reverse mortgage pitfall to avoid.

Loan Money…It Must Be Paid Back

The second of the reverse mortgage pitfalls is that you have to remember that this is loan money…you need to pay this money back. And every penny that you take now will be less that you can give to your children when you pass on, with interest on top of that. The loan amount reduces the equity in your home and will leave less for you and your children later.

Beware The Mortgage Broker

The next of the reverse mortgage pitfalls is dealing with the unscrupulous sales people. This isn’t to say that all of them are bad, but there are many sales agents and mortgage brokers that will put their interests ahead of yours in an attempt to make a quick buck.

The mandatory counseling session will help to keep many of these people honest, but it is important for you to realize that anyone you are dealing with could be taking advantage of you and hire proper representation to look out for your own interests.

Qualifications

Another of the reverse mortgage pitfalls is that while you do not need to qualify for the loan in terms of your credit, but your house does. This means that you need a large amount of equity in the home, or for your home to be paid off, to qualify for a reverse mortgage.

It also puts you in the unusual position of having a 750 credit score but getting rejected for the loan because you do not have enough equity.

Also, staying in your home may be expensive. In addition to the utilities and taxes, standard home maintenance can cost hundreds of dollars per month and be one of those reverse mortgage pitfalls that you don’t become aware of until after you have closed.

For many seniors, they are looking to slow down and reduce the speed of life. Maintaining their home may not be at the top of your priority list at this point in life.

For those in this position, maybe avoiding this reverse mortgage pitfall, selling their home and moving into a senior community would be the better option because them the maintenance is taken care of for you.

Cheaper Alternatives?

The next of the reverse mortgage pitfalls comes from understanding that there are could be cheaper alternatives for you out there.

It really depends on the purpose of the loan. So before you go ahead with the reverse mortgage make sure to check with your local Office of the Aging to see if there are any other alternatives that may be available for you.

For example, you may be able to get home repairs or weatherization assistance through the Office of the Aging and avoid the reverse mortgage altogether.

Perhaps the biggest of the reverse mortgage pitfalls is the possibility that obtaining a reverse mortgage MAY affect your Medicaid or any other forms of government assistance that you are currently getting.

For this reason this could be the biggest of the reverse mortgage pitfalls and would be a prime reason why you may want to consider alternative options.

Subscribe to our Newsletter!

And get your free report, 19 Free Services Every Senior Needs 

Tags:
Previous Post

Reverse Mortgage Pros and Cons To Be Aware Of

Next Post

Reverse Mortgage Payout Options For Seniors

Leave a Reply

Your email address will not be published. Required fields are marked *

*