What is a Reverse Mortgage?

By:

A reverse mortgage is a type of loan that allows homeowners 62 years of age or older to convert a portion of their home equity into cash without selling their home or making monthly mortgage payments. Instead, the loan balance increases over time and is typically paid back when the homeowner or their heirs sell the home or no longer live in it as their primary residence.

With a reverse mortgage, the homeowner retains home ownership and is still responsible for paying property taxes, insurance, and maintenance costs. Reverse mortgages can be useful for homeowners who need extra cash for living expenses or to pay off debt and have significant home equity.

It’s important to fully understand the terms and risks of a reverse mortgage before deciding if it’s the right choice for your situation.

However, they also come with potential risks and drawbacks, such as high fees, compounding interest, and the potential for the loan balance to exceed the home’s value.

What is the downside of getting a reverse mortgage?

While a reverse mortgage can be a useful financial tool for some homeowners, it also comes with potential risks and downsides that should be carefully considered before deciding to apply for one. Here are a few of the potential drawbacks of a reverse mortgage:

1. High fees: Reverse mortgages can come with high upfront fees and closing costs, which can eat into the amount of money you receive from the loan.
2. Compounding interest: Unlike a traditional mortgage, where you pay down the principal balance over time, with a reverse mortgage, the balance typically increases over time due to interest charges. This means that the longer you have the loan, the more interest you’ll owe, which can affect your home equity.
3. Risk of default: If you cannot pay property taxes, insurance, or maintenance costs on your home, the lender may foreclose on your property, resulting in you losing your home.
4. Reduced inheritance: If you plan to leave your home to your heirs, a reverse mortgage may reduce the equity they inherit.
5. Limited borrowing amount: The amount you can borrow with a reverse mortgage is limited by factors such as your age, the value of your home, and current interest rates. This means you may be unable to access as much money as you need.

It’s important to carefully consider these potential drawbacks and any other risks or benefits associated with a reverse mortgage before deciding if it’s the right financial tool for your specific needs. You may also want to consult with a financial advisor or other professional to help you make an informed decision.