For example, some people have gotten them to go back to school, pay off debt, pay medical bills, or start their own businesses. Others have used the funds for retirement, travel, or to buy a second home.
At least some of these reasons to get a reverse mortgage sound like good ones. But the truth is that there are a lot of reasons why a reverse mortgage is actually a bad idea.
Equity is Reduced
A reverse mortgage lowers the amount of equity you have in your home. Of course, your home could increase in value over the course of the loan which may cancel out the reduction in equity. Whether or not it does depends on the amount of the reverse mortgage and how much your home increases in value.
That’s a pretty big gamble to take, however. There is always a possibility that housing prices will drop causing the value of your home to dip below the amount of the loan instead. This is one reason a reverse mortgage is a bad idea.
Fees Can Be Substantial
The second reason a reverse mortgage is a bad idea is because getting one on your home will cost you a lot of money in fees. Just like for a traditional home loan, there are documents to prepare, closing costs, mortgage insurance, and other fees that drive up the costs of getting the loan.
In general reverse mortgage fees will run you at around $10,000. If your home is sizable it may cost even more. In addition, the associated fees will likely be higher than if you had taken out a traditional loan against your home.
Interest on the reverse mortgage will accumulate over time. This interest will continue to increase the longer you keep the loan.
This build-up of interest further lowers the equity you have in your home. This is why getting a reverse mortgage is a bad idea if you can avoid it.
Loved Ones Could End Up Homeless
When you own a home but do not live there alone a reverse mortgage is an especially bad idea. If you have taken out a reverse mortgage and then pass away your loved ones may end up with no place to live.
Heirs May Be Forced to Pay Back the Loan
Should you take out a reverse mortgage and then pass away, your heirs may have to repay the loan in order to inherit it. Of course, they could take out their own loan to pay back the reverse mortgage.
Another option is to allow the home to be sold and the loan to be paid. Anything left over would then go to the heirs.
Health Issues Can Put Your Home at Risk
If you get a reverse mortgage on your home to pay off high medical bills you could be putting your home at risk. Let’s say you end up in a nursing home or assisted living for 12 or more months. The bank could call the loan if that happens and foreclose on your home.
Your home would be put up for sale leaving you with nowhere to go if you are discharged from the medical facility. This is just one more reason why a reverse mortgage is a bad idea.
As you can see, even though in theory a reverse mortgage sound like it could solve some of your financial problems, it’s a very bad idea. You should avoid getting one if you can.
Do you know anyone who has had financial difficulty do to a reverse mortgage on their home?