What is the downside of getting a reverse mortgage?
High Fees: The upfront fees (closing and insurance costs and origination fees) for a Reverse Mortgage are considered by many to be somewhat high – marginally higher than the costs charged for refinancing for example. Additionally, FHA program changes in Oct-2017 increased closing costs for some, but ongoing servicing costs to hold the loan decreased for all. Show
However, the fees can be financed by the Reverse Mortgage itself so there are options to avoid “out of pocket” expenses at closing. For more information on the fees charged on Reverse Mortgages, consult the Reverse Mortgage rates and fees article. Accumulating Interest: There are no monthly mortgage payments on a Reverse Mortgage. However, you must continue to pay property taxes and homeowner’s insurance, maintain the property, and otherwise comply with the loan terms. As such, the loan amount – the amount you will eventually have to pay back – grows larger over time. Every month, the amount of interest you will eventually owe increases – it accumulates. However, the amount you owe on the loan will never exceed the value of the home when the loan becomes due. Most Reverse Mortgage borrowers appreciate that you don’t have to make monthly mortgage payments and that all interest and fees are financed into the loan. These features can be seen as Reverse Mortgage disadvantages, but they are also huge advantages for those who want to stay in their home and improve their immediate finances. And, for those who get the line of credit option but don’t use it right away, the rate at which interest accumulates actually has a benefit — it increases the amount you can borrow when you do need to access it. Not Enough Cash Can Be Tapped: If you have a lot of home equity, you might be frustrated that a Reverse Mortgage only enables you to use some of it. The HECM loan limit is currently set at $970,800, meaning the amount you can borrow is based on this value even if your home is valued for more. Your actual loan amount is determined by a calculation that uses the appraised value of your home (or the lending limit above, whichever is less), the amount of money you owe on the home, your age, and current interest rates. Have a higher value home? There are “Jumbo Reverse Mortgage” options available if your house value is greater than the limit listed above. It Seems Complicated: A Reverse Mortgage is a mortgage in reverse – that can be hard to get your head around. With a traditional mortgage you borrow money up front and pay the loan down over time. A Reverse Mortgage is the opposite – you accumulate the loan over time and pay it all back when you and your spouse (if applicable) are no longer living in the home or do not comply with the loan terms. Any equity remaining at that time belongs to you or your heirs. The basics of Reverse Mortgages can seem so foreign to people that it has actually taken many financial advisors and personal finance gurus some time to understand the product. Many experts shunned the product early on thinking that it was a bad deal for seniors – but as they have learned about the details of Reverse Mortgages, experts are now embracing it as a valuable financial planning tool. Advantages of a Reverse MortgageThe main advantage of Reverse Mortgages is that you can eliminate your traditional mortgage payments and/or access your home equity while still owning and living in your home. Given the right set of circumstances, a Reverse Mortgage can be an ideal way to increase your spending power and financial security in retirement. Key advantages and benefits of Reverse Mortgages include:
Beyond Advantages and Disadvantages, Reverse Mortgages Are Not for EveryoneWhile the following are not strictly disadvantages, it is important to remember that a Reverse Mortgage may not be for everyone, consider the following:
Reverse Mortgage Pros and Cons… Do the Advantages Outweigh the Disadvantages?Studies indicate that more than 90 percent of all households who have secured a Reverse Mortgage are extremely happy that they got the loan. People say that they have less stress and feel freer to live the life they want. Learn more about the fees associated with a Reverse Mortgage or instantly estimate your Reverse Mortgage loan amount with the Reverse Mortgage Calculator. Who benefits most from a reverse mortgage?1. Helps Secure Your Retirement. Reverse mortgages are ideal for retirees who don't have a lot of cash savings or investments but do have a lot of wealth built up in their homes. A reverse mortgage allows you to turn an otherwise illiquid asset into cash that you can use to cover expenses in retirement.
What are the disadvantages of getting a reverse mortgage?But a reverse mortgage comes with several downsides, such as upfront and ongoing costs, a variable interest rate, an ever-rising loan balance and a reduction in home equity.
How much interest is charged on a reverse mortgage?Reverse mortgages can have fixed or variable interest rates. 1 Fixed rates remain the same for the duration that interest accrues.
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Reverse Mortgage Interest Rates.. What percentage of equity is required for a reverse mortgage?You must own your home outright or have at least 50% equity in your home to be eligible for a reverse mortgage loan. Even if you owe some money on your existing mortgage, you may be eligible for a reverse mortgage.
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