For seniors short on cash but rich in home equity, reverse mortgages offer a very unique opportunity. Reverse mortgage loans give seniors, ages 62 and older, the opportunity to convert some of the equity in their home into cash. Through a reverse mortgage, seniors are able to repay their existing mortgage loan, cover large bills, and supplement their retirement income.
Unfortunately, reverse mortgages are not free, nor are they without disadvantage. Understanding certain reverse mortgage disadvantages is just as important as understanding the benefits of these loans.
Common Reverse Mortgage Disadvantages Affecting Consumers
One of the most talked about reverse mortgage disadvantages is the fact that a reverse mortgage will affect the inheritance one leaves to his or her heirs. Reverse mortgages must be repaid once a borrower passes away or decides to leave the home. Unless the home is worth more than what is owed to the lender, a borrower’s heirs might not receive money from the estate.
There is no arguing that this is one of the most important reverse mortgage disadvantages. Yet, the truth is, most people would rather their loved ones live comfortably than receive a large inheritance. Additionally, there are ways for borrowers to make sure that their heirs inherit the property. For instance, a borrower might obtain a life insurance policy that covers the loan amount. A borrower’s heirs can also repay the lender on their own or choose to refinance.
Some borrowers also worry that a reverse mortgage might be too expensive, affect their government assistance, or force them to stay in their home indefinitely. These are all very valid concerns. On average, it is true that reverse mortgages are more expensive than traditional mortgage loans. The main difference is that, with a regular mortgage, borrowers will be required to make payments to their lender. With a reverse mortgage, the lender will be providing the borrower with cash that will not need to be repaid until the borrower leaves the home. If a senior is struggling financially, a reverse mortgage can make retirement much more comfortable.
As far as a reverse mortgage affecting one’s government benefits, this is usually not the case. A reverse mortgage will not affect one’s Medicare or Social Security benefits. Medicaid and Supplemental Security Income might be affected. One’s case worker will be able to further explain the impact a reverse mortgage will have on one’s benefits.
Borrowers who fear they might be stuck in their homes can also cross this off their list of reverse mortgage disadvantages. While a reverse mortgage must be repaid once a borrower sells the home, borrowers can move if they wish. In fact, there is a program specifically designed to help borrowers purchase a home using a reverse mortgage. This program is called the HECM for Purchase program and was made available in early 2009.
Do the Reverse Mortgage Disadvantages Outweigh the Benefits?
Whether or not a loan is worth the possible reverse mortgage disadvantages is a very personal decision. If a borrower intends to move from his or her home in a few years, a reverse mortgage might not be the most beneficial option. However, seniors who plan to stay in their home for several years, have a small mortgage balance, and are in need of cash might want to consider a reverse mortgage
While a reverse mortgage should not be considered a retirement tool, one’s mortgage loan is a form of forced savings. If a senior is in danger of losing his or her home or simply needs additional cash, it makes sense to tap into one’s equity. Of course, along with the unique benefits reverse mortgages present, there are also disadvantages. Whether the benefits outweigh the disadvantages will depend on a borrower’s unique situation.