In recent years seniors have been presented with another option for income during their retirement. The reverse mortgage allows homeowners age 62 or older to use the equity on their house as a way to increase their income, either in a lump sum payment or through monthly pay outs from their lender. While a mortgage is a loan that is paid down starting the first month after it’s approved, the reverse mortgage isn’t paid until the house is sold. This creates a new debt on the home, perhaps long after the original mortgage had been paid off. This can be seen as a disadvantage to some. There are several other disadvantages to applying for a reverse mortgage and this option should be considered carefully against other income options.
High Costs and Fees
Reverse mortgages are not based in a persons income or credit score. They are based solely on the equity of the house. Because of this, lenders can charge large up front costs including closing type fees and processing fees. For some retirees looking for the reverse mortgage as additional income, the up front fees can be very expensive. Also, because reverse mortgage lenders have to wait years and even decades to recover the loan amount, they often charge high interest rates.
Reduction in Government Assistance
Because the money gained from a reverse mortgage is considered income or “liquid assets”, that can work against seniors collecting some types of government assistance. While social security payments are rarely if ever affected, other types of assistance such as food stamps, heating assistance, and medicaid can be. These programs are based on a person’s income level. If income increases, then these programs can cease to be offered. In the long run, it might not benefit a person to lose these services versus the gain from the reverse mortgage. Seniors should check with their state or county to determine if their benefits could be affected before applying.
Loss to Heirs
While some seniors may not consider the reduction in money for their heirs as a detriment to applying for a reverse mortgage, to some it can be a drawback. Because the reverse mortgage has to be paid back when the homeowner dies, this can leave the heirs faced with either paying back the mortgage themselves or selling the home in order to pay the loan.
Must Live in the Home
One of the conditions of a reverse mortgage is that the person applying must live at the residence. If there is a possibility of having to move in the near future, perhaps to assisted living or a more manageable home, the reverse mortgage might not be a good option. As soon as the homeowner is out of the home they have to start paying back the reverse mortgage. If there were a lot of upfront fees or a high interest rate, the homeowner could end up owing more then the loan was worth.
As with any situation involving money lending, homeowners should be sure to find a reputable mortgage company to work with. Offers that sound too good to be true, usually are. Avoid those promising super low interest rates, fast processing, or anything else that makes it sound like they are trying to “sell” their services. Seniors can check with their bank, the better business bureau, or the FHA to find an approved lender.