Some believe a reverse home mortgage is an excellent option to improve their finances while on a fixed income during retirement. After all, commercials with celebrity spokesmen that are clearly catered towards seniors make it seem like this is the right move. However, there are several drawbacks to using reverse mortgages, especially for seniors searching for a way to improve their quality of life. It is why many should look into a home equity line of credit (HELOC) instead. Like any major financial decision, it’s always good to review with a processional, or at least a family member or friend to ensure this makes the most sense for your situation.
What Happens with Reverse Mortgages?
Purchasing a home and taking out a mortgage involves borrowing money. The amount you owe accrues interest each month. You should be able to make monthly payments to reduce your balance. A reverse mortgage works in the opposite way.
As the name suggests, it is the reverse form of the mortgage process. Therefore, what happens is that the bank will provide you with money upfront and the interest accumulates every month. This loan is offered to you after you already own a house. You cannot repay the loan unless you move out of the property or you pass away. If it is the latter, you do not have to pay the loan back. Instead, the estate will provide the payment. The amount will not go over the current value of the house. Taking out a reverse mortgage can either be as a line of credit or a lump sum.
The Drawbacks
The process sounds easy and ideal for those who need cash. However, reverse mortgages have a number of disadvantages, making HELOC’s a much better option:
- High Fees: Many people have complained about the high upfront fees of reverse mortgages. From the closing to the origination to the insurance costs, this type of loan is much higher than the charges for refinancing, for instance. Home equity lines of credit, on the other hand, are known for their low closing costs. You also do not have to pay any loan servicing fee.
- Increasing Interest: One of the reasons why people opt for reverse mortgages is that there are no monthly payments to make. The problem with it though is that the amount you need to pay back continues to grow as time passes. It is because of the interest rate that you owe accumulates every month.
- Receive a Smaller Amount than Expected: Many complain that there is not enough cash that they can tap with a reverse mortgage. It can be frustrating, especially for those who have a lot of home equity.
- Administration is Limited to $726,525: Although it is a large amount, you can only borrow based on the mentioned value, not against your home value.
- Complicated process: Most consumers are used to a traditional mortgage where they can borrow money upfront and repay it. Since reverse mortgages are the opposite, it can be difficult to wrap their head around the idea.
