Disadvantages of Reverse Mortgages

Posted by: Sophie H. | Jan 20,2008


I’ve written my reverse mortgage post before.  That was a pretty pro-reverse mortgage post and I feel like I should temper that with some info on why reverse mortgages are not for everybody.  To a lot of retirees, reverse mortgages seem to good to be true.  Basically it amounts to not having to pay a mortgage during retirement, as the mortgage is already, in a sense, paid for because it will be paid on the back end through the sale of the house.  

This is the perfect scenario for a retiree who doesn’t have any beneficiaries.  The percentage of retirees who don’t have children or someone else to receive an inheritance has to be pretty low.  I don’t have any numbers offhand, but I’d imagine that most retirees want to leave behind some financial legacy to their loved ones.  By getting a reverse mortgage, you are basically leaving your house to the lender, rather than family, as the house will be sold off and the resulting payout will go to the lender.  

This scenario depends in part on how much equity you’ve already built up in the home.  If you’ve built up significant equity, a lower percentage of the future home sale will go to the lender.  However, keep in mind that reverse mortgages are more expensive than standard mortgages, so even if you have significant equity, a reverse mortgage will take a larger chunk out of the sale of the home.  Another consideration is if your children would even benefit from inheritance.  If your children are very well off, then the money from a house sale might not even be necessary.  This is not so common a case, but it should be mentioned.

Generally, when people apply for a reverse mortgage, the result is a wash: they won’t pay a mortgage every month and their beneficiaries won’t see a lot of money from the sale of the home.  If this doesn’t bother you, then you should consider a reverse mortgage.  If you’re concerned about leaving a sizable inheritance after you die, a reverse mortgage may not be the best idea.  

Sponsored Resources Ads by Google