Advantages And Disadvantages Of A Reverse Mortgage

Advantages And Disadvantages Of A Reverse Mortgage

Any new venture has its own pros and cons. Now let us have a look on both the advantages and disadvantages of a reverse mortgage. One of the biggest advantages is no re-payments while you live in your home. This is a big draw for seniors looking for a loan. Many seniors opt to pay off their current loans and house payments. The second advantage is that you can live in your home as long as you wish. The amount you owe can never be more than the housing worth. There are also different withdrawal options.

You can choose to get your money in a lump sum, monthly installments, line of credit or a combination of all three. The decision is yours. The loan also has the benefit of tax-free proceeds. In fact, the IRS does not consider loan advances to be income. All those proceeds can go right into your pocket. Of course this is all determinant on the right lender too. Now that we have discussed the advantages, let us discuss the disadvantages. There are differences that people do not realize about reverse mortgages and conventional loans.

One disadvantage is the cost of a reverse mortgage, which can be very expensive. This is because of the rising-debt nature of the loans. A typical reverse mortgage may be $300 monthly with a yearly interest rate of 12% compounded monthly. Over ten years the homeowner could get $36,000 but owe $70,000! Another disadvantage is the complex contracts. The confusion from clients could hide hidden costs. It can become infuriating because the costs have no correlation to the amount borrowed. The third and most important disadvantage is the affect this could have on old age pensions, Medicaid and social security.

The problem is that many seniors are not aware of the advantages and disadvantages of a reverse mortgage and find out later. They realize that instead of getting more money they are losing money. There is the issue of a senior’s assets and estate. A reverse mortgage can actually reduce the value of these holdings. Down the road, it will affect any thing they may want to leave as an inheritance for their children and grandchildren. The only way to avoid these pitfalls is to choose your lender carefully. Then study the documents and do what is best for you.

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