Reverse mortgages could be a fit for some retirees requiring an unconventional financial solution, but seniors should keep a lot of potential caveats in mind if they find themselves seriously exploring whether or not they should take out a reverse mortgage loan. This is according to a column published this week at Forbes Advisor.
“A reverse mortgage may seem enticing if you’re retired and struggling with expenses on a fixed income. However, Reverse mortgages may be less appealing upon closer inspection,” writes columnists Kiah Treece and Rachel Witkowski. “Not only are there a number of reverse mortgage scams, but lenders can also impose high fees and closing costs, and borrowers must pay for mortgage insurance. Reverse mortgages can also come with variable interest rates so your overall costs could increase down the road.”
This is not to say that reverse mortgages are without potential benefits for the write borrower, the pair writes. While the closing costs and fees and the mortgage insurance premium are described as “high” and “costly,” the loan is described as a potentially good match for someone concerned about his or her ability to cover living expenses or meet other outstanding financial obligations.
Among the potential benefits, the duo writes that a homeowner can use a reverse mortgage as an alternative to downsizing if he or she seeks to age in place; using loan proceeds to pay off an existing traditional mortgage and free up additional cash for living expenses; and can avoid monthly mortgage payments entirely if the borrower keeps current on loan terms, taxes and homeowner’s insurance (among other obligations, like HOA fees if applicable).
Among the potentially negative consequences, the paid describes how reverse mortgage “scams” are prevalent which “prey on seniors who need cash to cover living expenses,” the column reads. ALso listed as negative is the loan’s negative amortization, where the loan balance grows over time as opposed to a traditional mortgage in which the balance decreases over time (since the borrower is making payments in that arrangement).
Other potential downsides include the prospect of less of a bequest to leave to an heir; a lender’s home maintenance requirements to protect the property’s future resale value; and how failure to comply with a reverse mortgage’s terms can lead to default or foreclosure (even though this is also true of traditional mortgages, as well).
A reverse mortgage should not be considered if a senior is planning on moving in the net few years; the home is intended to be a bequest asset; if other people besides the borrower(s) live in the home; or the costs cannot be covered, the column says.
Read the article at Forbes Advisor.