You see the commercials all the time. Get money from the equity you have built up in your home. But what are the downsides of this financial arrangement?
More and more on TV you are seeing commercials for reverse mortgages. They have been around much longer than the almost 20 years I have been helping the elderly as a geriatric care manager. For many people they are a great way to take advantage of the equity they have built in their home while staying in it. There are drawbacks.
Reverse mortgages often have very high initial fees, such as those for appraisal of the home, credit checks, and insurance, as well as closing costs, origination costs and service charges. So if you die or move out of the home before you have drawn much on the mortgage, you wind up paying a very high cost for what will have turned out to be a short-term loan.
There are also continuing fees and interest payments each year, which may take a serious bite out of the money you actually receive. When considering a reverse mortgage, have the lender show you in writing exactly what these total annual loans cost will be, not just for the initial year, but for the entire life of the loan,
Even more importantly, interest under a reverse mortgage loan compounds; in other words, you wind up paying interest on interest as the loan period goes on. In addition as you borrow more monthly or under a line of credit, the principle also goes up. The combination of these two spiraling debt factors means that over a period of years, a modest initial reverse mortgage can cost considerably more than conventional forms of borrowing and can eat up all the equity in the property. An elder who wants to preserve some equity to pass on to their heirs or to use in some other way after selling the house may instead wind up with a piece of property that has no residual value.
A reverse mortgage also ties the borrower to the house. Most reverse mortgages require that the loan be repaid when the borrower no longer lives in the house. If the borrower moves in with relatives, moves to another area, or enters a nursing home to receive better care, monthly payments and any line of credit stop, and the borrower must repay the loan within a certain time. Elders who borrow under reverse mortgages may one day find themselves faced with the unhappy choice of paying off the loan in order to move to a more comfortable, healthy, or secure setting, or staying put to continue receiving the mortgage benefits.
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