Comparing the upsides and downsides of a reverse mortgage should be complete before applying for a loan. Lender practices may vary substantially.
Anyone who considers a reverse mortgage should enter transactions with eyes wide open. The benefits of these types of loans are well known. However, the downside of relying on these loans is not well understood. Borrowers may need the assistance of a trusted legal counselor before applying to appreciate fully all disadvantages.
How a Reverse Mortgage Causes Home Equity to Decline
A reverse mortgage includes a legal obligation to pay interest according to the specifications included with loan documents. In most cases, the payment of interest is similar to rates charged in connection with conventional home loans. In a reverse mortgage however, payments are not made until the end of the loan term. Paying at the end of term allows interest charges to accumulate. Over a period of years, the amount of accumulated interest may exceed the total value of a home.
Exhaustion of Approved Loan Limits
Emergencies may arise and require immediate payment. In this event, a reverse mortgage lender may permit a homeowner to draw on the maximum loan amount to cover emergency expenses. However, an emergency draw does not increase the maximum approved loan amount. After an emergency draw, monthly draw limits may degrease substantially. Over time, a single large draw may eventually cause a homeowner to reach the maximum approved loan limit.
Illness and Hospitalization
Contracts require continuous occupancy to maintain home possession. Of course, trips and temporary absence do not violate contracts terms. However, if absence last for more than 12 consecutive months, a lender may declare abandonment and call the loan. Illness and extend hospitalization may trigger an abandonment situation even though absence is not voluntary. The last remaining spouse is particularly vulnerable to home loss if extended hospital care becomes necessary.
Related posts: