Advantages and Disadvantages of Applying for Reverse Mortgages

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There are many great reasons to apply for a reverse mortgage, but there are also some potential disadvantages and complications associated with them. It’s important for you to know both the good and bad sides of what you may be getting into when you sign a home equity conversion mortgage (HECM), as opposed to a standard home loan agreement. Here are some things to consider, both positive and negative, before you make your final decision.

 

 

HECM Closing Costs and Interest Fees Can be Confusing and Increase Over Time

One thing to be aware of is that home equity conversion mortgages have closing costs and associated fees. They are not fee-free. However, you won’t pay those fees out of your own pocket. Instead, they will be subtracted from the amount of money you receive from the loan.

 

As for interest fees, those increase as time passes. So, while you won’t have to make any monthly payments, the amount you owe in the end will be much higher than the amount you borrowed in the beginning. That is something that you need to anticipate and prepare for before you ever sign a loan agreement for a reverse mortgage.

 

The Amount You Can Borrow with a Reverse Mortgage May be Lower Than Expected

Even though reverse mortgages are home equity conversion loans, not all of the equity can be changed into spendable money. But what is a reverse mortgage borrowing limit and how is it calculated? It is an amount set according to the law that is designed to keep you from having to pay back more than a certain amount and protect lenders from loaning too much money to any one borrower. It means that you’re only going to get a percentage of your home’s equity converted to cash. The exact amount you will be eligible for depends on the appraised value of your home, how old you are, and other factors that the lender can outline for you.

 

Reverse Mortgages Offer Low Default Risks

One of the nicest advantages of a reverse mortgage is that you can’t default on it easily. A regular mortgage requires you to make monthly payments. When you miss one the lender can threaten you with default notices. Eventually they can actually take your home and assets.

 

It is possible to default on a reverse loan like this, but not easily. You don’t have to make any monthly payments, so there is no way to “miss” a payment. The only way you can generally default is by moving out of your home. Even if you do move, the lender can only sell your home and keep the amount of the proceeds that is equal to what you owe. The rest of the money goes to you. If there is no money remaining and there is still a balance on the mortgage, you don’t have to worry. The lender can’t attack any of your other assets, just the home itself.

 

You Can Live in Your Home as Long as You Wish

Some elderly people choose to sell their homes, move into small apartments or assisted living facilities, and use the money to help their families. But a reverse loan gives you the chance to use the money the way you want and still keep your large home and your independence. You can live there as long as you wish because you will still be the owner of the property. You don’t have to pay rent to anyone or worry about your home possibly being taken away.

 

You Can Receive Loan Payments on Your Own Time Schedule

Finally, keep in mind that a reverse mortgage can be customized for your needs in terms of the payment schedule. You can get a credit line, annuity, or lump sum. You can collect payments each month for a set number of months or permanently. It all depends on how much equity you need to convert at the time of the application versus over a long period of time for purposes like paying monthly bills.

 

 

 

 

 

 

 

 

 

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