A reverse mortgage can be quite beneficial in certain situations. However, it can also be detrimental depending on your living and financial situation. You have to examine both the good and bad sides of this particular form of home loan before you can decide whether or not it is the right way for you to proceed.
Be Aware of Reverse Loan Fees and Closing Costs
When considering reverse mortgage disadvantages and advantages, you must understand that a home equity conversion mortgage (HECM) of that type is not quite what it appears to be. Many people think of HECMs as having no associated fees, but they do. The only difference is that instead of you paying those costs after the fact an HECM lender will deduct the fees and closing costs from the total amount of money you are scheduled to receive.
Reverse home loans also come with interest fees, which are easy to dismiss at first because monthly payments are not required on such loans. However, you must be prepared to pay a lot of interest in the long run, especially if you do not pay the loan off in a relatively timely manner. Therefore, prior to signing up for a reverse mortgage, you must factor in the time it may take to pay off the loan with interest and the eventual cost based on the expected interest rate.
It is Difficult to Default on an HECM
When considering reverse-mortgage pros and cons one major advantage to think about is that it is very difficult to default on one like you could potentially do when borrowing money in a different manner. The reason for that is that you will still own your home and it cannot be taken away from you, nor can any of your other assets. The only time the loan will come due is if you vacate the home due to either passing away or moving out of the residence.
In the event that you do leave your home before paying off your debt to your lender then your home will be sold. The lender will keep an amount of sale proceeds equal to your remaining debt. If the debt exceeds the sale costs then the remaining debt will be negated. Your lender will not be legally able to obtain further funds from you or your heirs. However, if the debt is lower than the sale proceeds for the home then you or your heirs will receive the extra money from the sale of the home.
You Will Own Your Home, But Your Spouse or Heirs Will Not
There is no limit on how long you can stay in your home under the terms of a reverse loan of this sort. You cannot be evicted because you will remain the homeowner. That is a distinct advantage. However, when thinking reverse mortgage advantages and disadvantages you must keep in mind that the lending agreement will only apply to you. If you pass away or have to move into some sort of assisted living residence and vacate your home then the loan balance will come due. Unless it is paid, your spouse or heirs can be evicted so that your home can be sold.
Your Home’s Equity May Not be Entirely Accessible Through an HECM
Under the law there are limits about how much money can be borrowed through an HECM. Therefore, some percentage of your home’s equity will remain inaccessible. You must talk to a reverse loan lender to determine exactly how much money you can borrow against your home’s value. Your home’s value will also play a role in determining that monetary total.