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March 14^th 2022 - Philip Roe

Whether you are looking for your first home, to re-finance your current home, or any of a number of scenarios, it is important to know the variety of mortgage products out there. For a certain type of homeowner, reverse mortgages offer an interesting proposition. There are downsides of a reverse mortgage to be aware of, though.

Homeowners that are looking to take out cash against their value of the home will love reverse mortgages. But it is important to know the cons of reverse mortgages, too. This will be your one-stop-shop for reverse mortgages, how they work, and the pros and cons of reverse mortgages as well.

What are Reverse Mortgages?

A reverse mortgage is the type of home loan that lets you take money out against the equity in your home. Even better, you don’t have to sell your home, maintaining ownership throughout the life of the loan. You may have also heard it termed an “equity release.”

Borrowers can take up to 55% of the current appraised value of their home in a reverse mortgage. The three primary factors for determining the borrowing amount are: the lender you use, your age, and the current appraisal value of your home.

How Do Reverse Mortgages Work?

It is important to note that you can’t take out a reverse mortgage if there are any outstanding mortgages or lines of credit against the home. In addition to a mortgage, you may also have a home equity line of credit (HELOC). The good thing about a reverse mortgage is that you can use it to pay off that loan if you choose.

You can also use your loan to pay for home repairs and improvements, to repay debts, to cover healthcare expenses, and to even help with regular bills.

The great thing about reverse mortgages is that there are no regular payments to make. Depending on the lender, there will be options as to when both the principal and the interest can be paid in full. Just be aware that some lenders may have fees associated with paying off your reverse mortgage early.

The loan becomes due under certain circumstances. It becomes due when you either sell your home or move out of it, the last borrower on the title passes away, or you happen to default on your loan. Defaulting terms can vary on lender. There are, however, some common instances that can cause defaulting.

If you use the money from the mortgage for an illegal venture, it will cause the loan to default. Being dishonest during the application process or failing to follow the specific conditions of the contract would do so as well. Lastly, if you let your home fall into such a state of disrepair that the value lowers, it would cause the loan to default.

What are the Downsides of a Reverse Mortgage?

While we are keenly aware of all the good things about reverse mortgages, there are some downsides as well. Being aware of them before applying for a reverse mortgage can help avoid unexpected surprises.

Firstly, the interest rates on a reverse mortgage will likely be higher than your traditional mortgage. One of the largest downsides of a reverse mortgage is that the equity in your home may go down with the more interest accumulated on the loan.

When it comes time to pay back the loan, there can be some caveats. Should you pass away, the burden of repaying the loan and interest will be passed on to your estate. In most cases, they will have 90 days to repay the balance, though it can vary depending on where you live and the lender that you choose.

That can be problematic in itself. In some instances, the time that is required to settle an estate can actually take longer than the period allowed to repay a reverse mortgage. The costs involved in paying off the reverse mortgage also tend to be quite high. That’s especially true compared to any other credit product or regular mortgage.

Lastly, there is the possibility that there will be less money left in the estate for children and other beneficiaries.

Who Do I Ask About the Pros and Downsides of a Reverse Mortgage?

The first place that you need to start when inquiring about reverse mortgages is with the team here at Lotus Income. We have years of experience that can get you the answers that you need. The most important thing when it comes to finding a reverse mortgage is knowledge. Being armed with the answers to your questions is important. It can mean the difference between a favorable loan and one that you regret.

Reverse mortgages have their own unique set of pros and cons and definitely are not suitable for anyone who qualifies. Discussing with a professional is a great first step. It will at least give you a better understanding of this type of loan.

Call our team today or check out our FAQ page to find the answers to your questions. We can get you started down the path to a reverse mortgage today.