On the surface, reverse mortgages seem like a great idea, but they are not right for everyone. It seems like everyone touts the advantages of a reverse mortgage, but the disadvantages are not always brought to the light. Here is a look at reverse mortgages and some things to look out for when considering this option.
What Is A Reverse Mortgage?
A reverse mortgage is a loan that uses the equity in your home to pay you cash. You are not required to pay back the money as long as you are using the home as your primary residence. There are some stipulations to a reverse mortgage. You must be 62 years or older. You must own your home free and clear or have a very low mortgage balance that can be paid off with the proceeds of the reverse mortgage. You must also use the home as your primary residence. The only homes that are eligible are single family homes, 2 or 4 units, and some townhouses and condos.
What Are The Disadvantages Of A Reverse Mortgage?
Reverse mortgages are more costly than other types of home loans. Because you are not making payments, the amount of interest applied to the loan continues to compound month after month. It adds up much more quickly and can end up eating away all of your hard earned equity. Reverse mortgage lenders also have to ability to charge exorbitant fees.
Because it uses some or all of the equity in your home, you will not have as much to leave to your heirs. This can be a source of contention in a family. Any equity that is remaining after the loan is repaid, however, becomes yours or the property of your estate.
You are responsible for all of the real estate taxes and home owners insurance on your home. If you fail to maintain them, your loan can be called and be due in full. You must also still take care of the expense of running the home such as electricity, water, gas, and maintenance.
Additionally, you cannot claim the interest you pay on your reverse mortgage on your taxes until the loan is paid. This differs from a traditional mortgage or home equity loan where you can deduct the interest you pay on your taxes.
Things To Consider If You Choose A Reverse Mortgage
Shop around before you choose a lender. There are many different lenders to choose from, so ask lots of questions before you commit. Do not use an estate planning service to obtain your reverse mortgage. They will charge you ridiculous fees to find you a lender. HUD offers this service to you for free.
Make sure you pay attention to the APR, or Annual Percentage Rate. It is also important to consider what points you will be required to pay and what other closing costs will be imposed. If these charges are rolled into the loan amount, it will decrease the amount of money that is paid to you and you will ultimately pay more interest.
Be sure that you pay attention to all aspects and details of the loan. Make sure you understand all of the costs and stipulations. Don’t be afraid to ask questions. If the lender seems impatient with your queries, perhaps you should choose a different lender who doesn’t have anything to hide. Make sure you are well informed before taking out a reverse mortgage.