Major Setbacks of Reverse Mortgages
Reverse mortgages have gained a lot of popularity especially in UK and USA. This is due to the reason that old home owners have identified a new way of benefitting from long term loans using their homes as security. This is usually done by surrendering the equity of the home to a lender who in turn issues the loan. What most home owners do not realize is the fact that reverse mortgages are not as beneficial as they take them to be. This is due to the reason that they have very expensive drawbacks especially in the long run.
Reverse mortgages attract very high initial fees. These fees are such as appraisal fees, credit check fees, insurance fees among other costs encountered while processing these mortgages. Therefore in situations where you may decide to move out of the house before the mortgage matures, there is usually a very high likelihood that the remaining high costs of the mortgage are converted to short term loans. These loans are usually very demanding and as such they can easily cause a financial burden on the home owner.
Other than the high initial costs, reverse mortgages also attract very high annual interest rates and other continuing fees. All these costs and fees are usually deducted from the main loan (mortgage value) a factor that considerably lowers the amount of money you will receive from the lender. It is therefore important that before applying for this type of mortgage, you should ensure that you are able to analytically calculate the total value of the mortgage. You should be able to calculate the amount of money that you will receive from offering your home for a reverse mortgage.
Interest in reverse mortgages is usually calculated under compound terms. This means that you end up paying interest over interest, a factor that just increases the total value of the loan. What is more disadvantageous about these loans is that the value of the principle amount increases with regular monthly borrowing. The impact of this accumulation of principle is usually felt in the long run. This is in a situation whereby the loan can easily exceed the home’s equity and thus you will be in more debt to the lender. This is usually quite risky and destructive especially in the event that the elderly home owner may wish to sell the house or even pass it to an heir. The residual value of the property is almost zero and therefore it can not fetch any considerable amount of money in the market.
A reserve mortgage is quite tying in that it ties down the home owner to the property until the homeowner passes away. This means that if the home owner may decide to move in with a relative or even move to a nursing home, the mortgage has to be repaid back within a specific duration of time. This can impose a great financial burden on the home owner especially given the fact that he/she does not have any substantial income. It is therefore important to seek the services of a financial adviser every time before applying for a reverse mortgage. This is important in that it helps in ensuring that you are in a position to make the perfect financial decision concerning your property.