Although the benefits of a Reverse Mortgage are tremendous I would be remiss if I didn’t discuss some of the perceived disadvantages of the Reverse Mortgage.
The three disadvantages we discuss the most with clients are reduced inheritance, interest rate and fees included for arranging the mortgage. Let’s examine each of these more closely.
Reduced Inheritance. As you are borrowing against the equity of your home your estate value will be reduced. When considering a Reverse Mortgage, we advise clients to speak to those family members (children or grandchildren) first to discuss the reasons why you are considering this. In many circumstances, the reason for drawing out this equity is to eliminate any outstanding liabilities and generate cash-flow. We have yet to run into a situation where the children would rather watch parents endure any sort of financial hardship as opposed to possibly receiving a little bit more money at some undetermined date in the future in the form of an inheritance.
Interest Rates. As this is a loan borrowed against the value of your home you are susceptible to interest charges. As of the writing of this article, interest rates are typically between 2.5 – 3% higher than having a conventional mortgage. Why is this? One of our lenders explained to us that the average length of time before they receive payment is 14 years! Unlike conventional mortgages that generate income for the lender immediately through the form of monthly payments, they do not earn a penny. As such it should seem reasonable to you that if you are going to be lent money for an undetermined amount of time without having to make any payments for the duration of the loan that it should cost slightly more than a conventional mortgage.
Fees. The only out of pocket expense you will have is an appraisal. Appraisals typically cost between $300 – $450 depending on location and type of property. All remaining fees are usually deducted from the proceeds of the mortgage although you could pay for this upfront if you were so inclined. The remaining fees include independent legal advice, registration, fee administration, and title insurance. As of the writing of this article, the fees combined could total as much as $2,500.
Hopefully, this has enlightened you as to a few of the disadvantages of a Reverse Mortgage.