The Downside of a Reverse Mortgage
A reverse mortgage is a type of loan open to homeowners age 62 and older. Unlike with a traditional mortgage, homeowners don’t make payments to a lender with a reverse mortgage. Instead, the homeowner receives payments. You can choose to receive your payments as a lump sum, a monthly payment, or a line of credit.
The amount you receive as a monthly payment depends on three factors:
- The home’s value
- The cost of the reverse mortgage
- The homeowner’s age
Older homeowners living in high-value homes generally qualify to receive the highest payments. This extra income stream can help them cover daily living expenses, especially those homeowners who are on a fixed income.
How a reverse mortgage works
Homeowners don’t make any repayments on a reverse mortgage while living in the home as their principal residence. Because no payments are being made, the amount owed on this type of mortgage increases over the life of the loan. That’s because of the interest that the lender charges. Homeowners can never owe more on a reverse mortgage than what the home is worth when the loan is repaid.
Be aware, too, that lenders usually charge fees for a reverse mortgage. Homeowners can either pay these fees up front or roll them into the loan’s balance. With the second option, the fees will be paid off when the balance of the reverse mortgage is paid in full.
When is a reverse mortgage repaid?
Reverse mortgage loans are paid off in full either after the home is sold or the last living borrower on the reverse mortgage dies.
The downside
Homeowners who take out a reverse mortgage might not be able to leave the home to a child or other relative. That’s because when the homeowner dies, the reverse mortgage must be paid off. This usually means selling the home and using the proceeds from the sale to pay off the balance of the reverse mortgage. If the home sells for more than the balance of the reverse mortgage, the homeowner’s heirs will receive the extra cash.
This might not be a problem if leaving the home to heirs was never part of the homeowner’s plan. But if it was, the heirs would need to pay off the reverse mortgage with their own funds if they wanted to keep the home. That might not be possible depending on the balance of the reverse mortgage.
A reverse mortgage, then, is usually not a good choice if you intend to leave your home to a child or other relative.
Deciding whether to apply for a reverse mortgage is not an easy decision. The extra money that homeowners receive with one of these loan products can help make retirement years easier. Just keep in mind that leaving your home to a loved one might not be possible if you die with a reverse mortgage.
