The Disadvantages Of Reverse Mortgages

The Disadvantages Of Reverse Mortgages



The Disadvantages Of Reverse Mortgages
A reverse mortgage can be an​ attractive option for many home-owning seniors that are having a​ hard time making ends meet .​
With a​ reverse mortgage,​ a​ senior homeowner will receive money for their home equity from a​ lender without having to​ make repayments for as​ long as​ they live in​ their home .​
So with the​ right reverse mortgage a​ senior homeowner can maintain their standard of​ living while retaining ownership of​ their home.
This of​ course,​ is​ the​ picture that all the​ reverse mortgage companies try to​ paint for prospective borrowers .​
Nonetheless,​ there are many differences that have to​ be understood between reverse mortgage's and conventional loans .​
If these differences are not understood,​ they can cause financial problems for reverse mortgage borrowers.
Disadvantages of​ Reverse Mortgages.
The first disadvantage is​ the​ relative cost of​ a​ reverse mortgage .​
Reverse mortgages tend to​ be very expensive when compared with a​ conventional mortgage .​
This is​ due to​ the​ rising-debt nature of​ reverse mortgages .​
For example,​ a​ typical reverse mortgage may provide a​ homeowner with a​ $300 per month payment with a​ yearly interest rate of​ 12 percent compounded monthly .​
Over the​ course of​ ten years,​ the​ homeowner will receive $36,​000 in​ payments,​ but will owe almost $70,​000-almost twice as​ much as​ received .​
The second disadvantage is​ the​ complex and confusing contracts of​ reverse mortgages,​ that can have a​ tremendous impact on​ the​ overall cost of​ a​ reverse mortgage to​ the​ borrower .​
The complexity of​ the​ contracts often allow lenders and third parties involved in​ arranging reverse mortgages to​ not fully disclose the​ loan's terms or​ fees .​
These numerous other front-end and/or back-end fees can also quickly drive up the​ cost of​ a​ reverse mortgage .​
These fees can include origination fees,​ points,​ mortgage insurance premiums,​ closing costs,​ servicing fees,​ shared equity and shared appreciation fees .​
Out of​ all these fees,​ the​ shared equity and shared appreciation fees should be avoided,​ as​ they can quickly raise the​ cost of​ the​ mortgage without providing any benefit to​ the​ borrowers .​
As an​ example,​ a​ shared appreciation fee can give a​ lender an​ automatic 50% interest in​ the​ difference between the​ current value of​ the​ home when the​ loan is​ signed and the​ appreciated value of​ the​ home when the​ loan is​ terminated .​
What makes the​ fees unfair is​ the​ fees have no relation to​ the​ amount that is​ borrowed.
The third disadvantage is​ the​ reverse mortgage payments can affect eligibility for old age pensions,​ Medicaid,​ or​ supplemental Social Security income .​
Senior's may not even realize this problem until after they already have their reverse mortgage,​ and only then do they find out that this can have the​ opposite affect on​ a​ seniors finances then what they were trying to​ accomplish in​ the​ first place by taking out the​ reverse mortgage.
Another disadvantage is​ the​ fact that reverse mortgages reduce the​ value of​ a​ senior's assets and estate .​
This will affect the​ amount of​ inheritance received by the​ borrower's heirs .​
How to​ avoid these hazards
The best way for a​ senior to​ avoid these hazards is​ to​ be careful when choosing a​ lender,​ by obtaining bids from three separate lenders .​
They should take these contracts to​ a​ reverse mortgage counselor for evaluation .​
This will allow them to​ accurately evaluate the​ three contracts before deciding on​ best one for their situations.




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