Reverse Mortgage Disadvantages

Reverse mortgages allows an elderly homeowner to make use of their home’s equity in order to generate monthly funds for themselves. This is a type of loan that works in the opposite manner of a traditional mortgage, thus the name reverse mortgage. Instead of paying the lender, the lender sends you money on a monthly basis, on a lump-sum, or on a needed basis. The total amount owed by the borrower will not be paid until they are no longer able to occupy the house.

To be qualified for a reverse mortgage, you or your spouse should at least be 62 years of age. The home used for the reverse mortgage should be your primary residence and it is completely paid or nearly completely paid. When the time comes that you or your spouse will leave the house due to illness or death, the amount owed will need to be paid back. The heirs will now decide on how to handle the loan. It’s up to them if they will sell the house and use the amount for the repayment or remortgage the house with a traditional home loan. The lender usually gives the heirs up to one year for the decision making process.

Although this is one way to answer the financial needs of some elderly people, one should know the several disadvantages involved in reverse mortgages. Some of the reverse mortgage disadvantages are as follows:

  1. High Cost – Due to the fact that the lender assumes many risks, closing cost and interest rates are relatively high with reverse mortgages. For example, the life expectancy estimate is off, and the borrower stays at the house past what is expected, the lender misses out on what should have been returns of his or her money if it was invested elsewhere.
  2. Compounding Interest – With reverse mortgages, the interest is added back to the principal and compounded each month making the growth of the loan very fast. The owed amount could even appreciate faster than the value of the home itself.
  3. Impact on Heirs – With reverse mortgages, the value of your home will drastically fall. This is because the total loan amount including the interest will be taken out of the equity of your home.

If you are planning not to stay in the same home for a very long time, getting a no closing cost refinancing loan can be a great deal for you. There will be an additional .2% to 1% on the interest rate of no-cost refinance loans if compared to a standard refinance loan. You can save a considerable amount of money if arranged on a short-term basis rather than in a long-term basis.

There is also a refinance guide when it comes to refinancing after bankruptcy. Give yourself a certain amount of time to rebuild your credit and get a better rate before refinancing. Yes you can readily get a refinance loan after you go bankrupt, but taking one step at a time will show the lender that you are on the right track and you have learned your lesson, thus the lender will be more than willing to arrange a better rate for you.


Look for cheap mortgages. The cheapest mortgages allow you to pay less monthly interest, saving you from paying potentially very large amounts through the course of the mortgage.


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