Reverse Mortgage Disadvantages
There are a number of reverse mortgage disadvantages, it’s important to understand both the pros and cons of getting a reverse mortgage before signing on the dotted line.
What Are The Reverse Mortgage Disadvantages?
- High origination fees, setting up a reverse mortgage can be extremely expensive. It often costs in the $5,000 – $10,000 range to set up this loan type.
- Monthly fees, it’s typical for reverse mortgages to have monthly fees of $15-$25 per month. This might not sound like a lot but it can quickly add up, especially when you take compound interest into account. For example if a senior takes a loan out when they are aged 65 and it has monthly fees of $15 they will have incurred fees and interest charges on those fees of $3,419 when they are aged 75 assuming an interest rate of 10%.
- Compound interest adds up quickly, borrowers are sometimes not aware of how quickly compound interest can add up and how this can affect their future plans. For example if a senior borrows $50,000 with a 10% interest rate at age 65 they will owe $74,468 when they are aged 70 and this assumes no monthly fees or origination fees on the loan!
- Variable interest rates, most (if not all) reverse mortgages come with a variable interest rate. This means that a borrower could start off with an interest rate of 4% which could quickly climb to over 10% because of externalities out of their control.
- No tax deductions, borrowers can not deduct the interest that is added onto the loan on their income tax returns unless they pay back the loan in part or in full.
- Loans can go into default, there are a number of things which can cause reverse mortgages to go into default – making them immediately payable. For example homes with reverse mortgages must be up to date with their insurance and property taxes, they also must meet minimum maintenance requirements which are set out in their contract. Failure to adhere to these conditions can cause the loan to become payable and in most cases this will cause the borrower to sell the home to pay for the loan.
- High insurance costs, reverse mortgages are insured by the FHA (federal housing commission) and require an upfront payment of 2% of the houses value. There is then an ongoing monthly payment of 1.25% per year, this is added to the loan as there are no ongoing immediately payable parts of a reverse mortgage.
How To Deal With These Reverse Mortgage Disadvantages
Thankfully it’s not all bad news, there are a number of ways to deal with these disadvantages so that they won’t affect the borrower. First of all it’s important to understand exactly how a reverse mortgage works, by doing so the borrower will be able to get an accurate idea of how much they will owe. We suggest using our reverse mortgage calculator as it allows you to put all of the costs associated in and then see how the interest will grow over time. Another easy way to deal with these disadvantages is to speak with a professional, fill your information in at the top of the page and speak with somebody today!
Did we miss a disadvantage? Got another idea on how to battle these disadvantages? Let us know in the comments!