Reverse Mortgage Disadvantages

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At a time when many Baby Boomers are approaching their retirement years with grave concerns over their income sources, the late night pitches for reverse mortgages may look quite appealing to some. As with any financial strategy, especially those that involve the equity in your home, they should be carefully weighed against your needs, concerns, and priorities. For the right situation, reverse mortgages may have their advantages. But, the disadvantages are many, so, with the limited space available for this article, they are covered here.

Five Disadvantages of Reverse Mortgages

They Increase Debt

Many people hope to reach retirement unencumbered by debt, including a home mortgage. It can be very disconcerting to some when they realize they create a mountain of debt. After years of paying down their mortgage, they are now adding debt to a new mortgage.

They aren’t Inexpensive

It’s a mortgage, and like any other, it comes loaded with fees including closing costs and all the other costs associated with establishing a mortgage. Some studies have revealed that reverse mortgage costs are substantially higher than regular mortgages. The bottom line is that, these costs are deducted from the home’s equity which is what is used to determine the amount of income that will be generated.

They Limit Your Legacy

Perhaps by the time retirees decide they need the income from their home, they may be less concerned with having it available for their heirs as a legacy. Regardless, by establishing a reverse mortgage, the lender has the first lien. If the home can be sold with proceeds available to pay down the reverse mortgage and selling costs, then, at least, there will be something to pass on to heirs. It may be possible to have the mortgage refinanced; however, it would depend on the interest rate climate and the credit worthiness of the heirs.

They can be a Financial Assistance Disqualifier

Income from a reverse mortgage may be a disqualifier if federal or state assistance is being received or is required in the future. This would most likely affect any assistance through Medicaid; however, it shouldn’t have any impact on Social Security or Medicare.

Forget Moving Plans

For the most part, a reverse mortgage locks you into your home. After all, it is the collateral used by your lender to secure the loan. If, you have always intended to stay in the home, then it may not be an issue. While it is possible to sell your home, a significant part of the proceeds are consumed by the interest costs and closing costs leaving you with much less than you expect from the sale.

Unquestionably, reverse mortgages can be beneficial in certain situations, and no one can be faulted with wanting to benefit from an asset that took decades to pay for. But, many people fail to thoroughly consider the consequences of reverse mortgages, and once they are established, they are not easily reversed.

*This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2022 Advisor Websites.