You’ve likely come across ads with celebrities promoting the benefits of a reverse mortgage. If you’re getting close to retirement, these might catch your eye, but choosing a mortgage is a big decision that needs careful consideration.
The main draw of a reverse mortgage is the promise of letting older homeowners (62 and up) access their home equity without having to sell or rent their house. Unlike regular mortgages, with a reverse mortgage, a bank or lender pays you each month.
However, it’s important to remember that this is still a loan. The obligation to repay doesn’t disappear while you’re living in the house, nor does the requirement to eventually pay back the borrowed money. At first glance, a reverse mortgage may seem like a great way to get extra income, but it’s crucial to dig deeper into what it really involves.
Before you decide on a reverse mortgage, here are seven reasons why it might not be a good idea:
1. Future Care Needs: As we get older, we might need some extra help. A reverse mortgage is okay as long as you stay in your home, but if you need to move to a nursing home or assisted living, you’ll have to pay back the loan. Handling such huge expenses can be overwhelming and might lead to financial hardship.
2. High Costs: Reverse mortgages may look appealing, but they can be very costly. The fees can add up to over 10% of your loan, taking away from the benefits. There are extra rules involved, leading to more costs that can lessen the appeal.
3. Interest Accumulation: Even though you don’t make payments at first, interest is still applied. The lender charges interest on the borrowed amount, which grows each year. If you don’t pay back the loan, your debt can increase significantly.
4. Impact on Benefits: Benefits like Medicare and Social Security aren’t affected, but Medicaid could be in danger if your mortgage income goes over the allowed limit. Be sure to check the rules of your benefits before deciding on a reverse mortgage.
5. Reduced Inheritance for Heirs: If you want to leave behind assets like home equity for your family, a reverse mortgage might not be the best choice. It reduces your home’s equity and increases debt, potentially affecting what your heirs receive if the loan isn’t paid off before you pass away.
6. Shared Living Concerns: If you live with someone who isn’t part of the mortgage agreement, like a relative, friend, or spouse, their living situation could be at risk if they can’t stay in the house without you.
7. Risk of Home Loss: While lenders claim you can stay in your home for life, managing other costs like property taxes, insurance, and repairs might become too much even with the added income from the reverse mortgage, increasing your risk of losing your home.
Like many things shown in ads, reverse mortgages might seem more appealing than they are. Signing up for one can have a big impact on your finances and family. Before deciding, think hard about whether the benefits really outweigh the drawbacks. If not, it might be better to make lifestyle changes instead.