Disadvantages Of A Reverse Mortgage: 3 Things You Must Know
In light of fact that given the choice, most people would rather stay in their home even when many can no longer afford to make a mortgage payment; and, given that many older homeowners don't want to become a burden to their children, the reverse mortgage has few real disadvantages.
Of course there's no such thing as a perfect tool or product. As such, you will find three or four recurring themes when you look into the disadvantages of a reverse mortgage.
The first is the fact that the homeower loses the mortgage interest deduction. Depending on the financial circumstances of the homeowner, this could be a concern.
Often times, you would be surprised to find yourself in as high a tax bracket in retirement as you were in your earning years. You may be at a disadvantage when you have little to
no deductions to offset the retirement income you may withdraw from qualified plans such as an IRA (excluding the Roth) or a 401(k).
The next topic you will find when looking into the disadvantages of a reverse mortgage is the negative impact on your heirs. The loan may very well use up all of the equity in a home because the total amount of compounding interest - which is added to the loan balance each month - increases significantly with time.
However, even with a reverse mortgage in place, there are strategies a seasoned financial professional can help you implement to ensure that you pass down your home free and clear to your heirs. Third, you'll find some discussions around the costly nature of the reverse mortgages compared to traditional loans. In general you will find more upfront costs associated with the reverse mortgage because lenders do charge origination fees, servicing fees and other closing costs. But you'll find that those fees tend to vary from lender to lender.
Lastly, there are certain restrictions placed on this type of loan based on the value of your home. In other words, your home must be within a certain value in order to qualify for the government-backed reverse mortgage. Otherwise, you have to look into alternative proprietary programs such as a
jumbo reverse mortgage.
If you count on the goverment for low-income assistance such as Medicaid, perhaps you may want to ask some questions as to your eligibility. However, Social Security and Medicare are not impacted by a reverse mortgage.
When you compare the above mentioned with the fact that this tool can help you maintain your financial independence
and annuitize the equity in your home with tax-free retirement income, the benefits seem to outweigh the disadvantages of a reverse mortgage.
If you're at least 62 years of age and did not have the opportunity to plan your retirement better with strategies like home equity separation, the reverse mortgage may be worthwile option to turn your home equity into the tax-free cash you need in your retirement. Find out if this financial tool fits with your financial needs and goals.
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