A reverse mortgage is a convenient way to use your home equity as a cash source during retirement, but there are some downsides to a reverse mortgage. Before committing to this home loan option, it's important to familiarize yourself with the dangers of reverse mortgages and learn how to lessen those risks.
You can choose to receive your funds through monthly payments, a lump sum of cash, a line of credit, or a combination of these options. Repayment on a reverse mortgage loan is due when you move out of your home, sell your home, or pass away.
Considering the age requirement, reverse mortgages are normally used as a supplementary income source during retirement to help cover medical costs, living expenses, and other financial needs.
Not all reverse mortgage dangers are unique to this loan. A downside that comes with reverse mortgages, along with many other types of loans, is that it can be tempting to overspend. With such a large sum of money available to you, it could be easy to lose track of how much you're borrowing.
As with other equity-based reverse mortgage alternatives, losing your home is the biggest risk of a reverse mortgage. Unexpected financial burdens like rising interest rates or healthcare costs could make it more difficult for you to make payments. And if you fail to pay property taxes, insurance fees, or other home-related costs outside of the loan, your house could be foreclosed. While you never know if these events will happen to you, it's still important to add some cushion into your budget just in case.
Another reverse mortgage downside is that you'll face higher origination fees than you would with a traditional mortgage. So, you'll have to scrounge up enough funds to pay the upfront charges. But if you're taking out a reverse mortgage for quick access to extra cash, you might not be in the financial position to afford such a hefty payment, creating a major barrier to entry.
Reverse mortgages can come with interest rates that fluctuate if they have a variable, rather than fixed rates. In that case, should rates continue to rise over time, homeowners may face less borrowing potential and more financial strain. This means your loan balance could grow significantly by the end of your loan term. So, if your budget is tight, a reverse mortgage with variable rates may not be worth the unpredictability.
Borrowing against your equity decreases the amount of equity you have in your home. This is one of the biggest problems with reverse mortgages, as you could be left with less to pass on to your heirs. Another negative effect of reduced home equity is that it could limit your options if you want to downsize later.
Before you take out a reverse mortgage, look into multiple lenders and carefully consider their costs, repayment plans, and other terms. Find one that fits your needs and has terms you feel comfortable with based on your budget. Once you find the right lender, be sure to work with them to land on a custom plan that's best for you.
There are three main types of reverse mortgages:
Different costs and terms are associated with each of these loan options, so research them all to figure out which is right for you, your home, and your financial situation.
If you're still on the fence about taking out a reverse mortgage, get some advice! A good financial expert can advise you on the investment options that are suited for your circumstances. You can also take reverse mortgage counseling classes to gain more information.
If you're particularly worried about the risk of overspending, have a backup plan. An emergency fund set aside to cover unexpected costs can potentially help you use less of your home loan over time. Taking a close look at your budget and ensuring it's realistic can also help you manage your funds well.
The best way to avoid the reverse mortgage risk of overspending is to only borrow what you need. Rather than pulling out excess cash to have as a backup, stick to the amount that covers only the essentials so you're never tempted to overspend.
The Equity Sharing Home Loan is an interest-only, ten-year second mortgage with a shared appreciation component that offers homeowners the opportunity to tap into their equity with low monthly payments. With partially-deferred interest and below-market rates, Unison designed the loan to offer more flexibility for homeowners when it comes to managing their monthly finances. In fact, your monthly payments could be as low as half of what they would be with a traditional equity financing option, such as a HELOC.
If you’re looking for a way to tap into your equity but keep your monthly obligation low, learn more about Unison’s Equity Sharing Home Loan today!
The content on this page provides general consumer information. It is not legal or financial advice. Unison has provided these links for your convenience, but does not endorse and is not responsible for the content, links, privacy policy, or security policy of the other websites.
- Understanding Reverse Mortgages
- What to Keep in Mind with a Reverse Mortgage
- An Alternative to Reverse Mortgages
Understanding Reverse Mortgages
Reserved for homeowners over the age of 62, a reverse mortgage is a home loan that allows you to turn part of your equity into accessible cash without having to sell your property. Unlike a traditional mortgage, where a borrower makes payments to the lender, a reverse mortgage requires the lender to make payments to the borrower.You can choose to receive your funds through monthly payments, a lump sum of cash, a line of credit, or a combination of these options. Repayment on a reverse mortgage loan is due when you move out of your home, sell your home, or pass away.
Considering the age requirement, reverse mortgages are normally used as a supplementary income source during retirement to help cover medical costs, living expenses, and other financial needs.
What to Keep in Mind with a Reverse Mortgage
It’s important to consider all aspects of a reverse mortgage if you’re thinking about obtaining one. Be aware of some of the potential downsides and utilize these tips.It May Be Tempting to Misuse Funds
Not all reverse mortgage dangers are unique to this loan. A downside that comes with reverse mortgages, along with many other types of loans, is that it can be tempting to overspend. With such a large sum of money available to you, it could be easy to lose track of how much you're borrowing.
You Could Lose Your Home in a Foreclosure
As with other equity-based reverse mortgage alternatives, losing your home is the biggest risk of a reverse mortgage. Unexpected financial burdens like rising interest rates or healthcare costs could make it more difficult for you to make payments. And if you fail to pay property taxes, insurance fees, or other home-related costs outside of the loan, your house could be foreclosed. While you never know if these events will happen to you, it's still important to add some cushion into your budget just in case.
You Could Be Swimming in High Upfront Costs
Another reverse mortgage downside is that you'll face higher origination fees than you would with a traditional mortgage. So, you'll have to scrounge up enough funds to pay the upfront charges. But if you're taking out a reverse mortgage for quick access to extra cash, you might not be in the financial position to afford such a hefty payment, creating a major barrier to entry.
Your Budget Might Collapse Under Variable Interest Rates
Reverse mortgages can come with interest rates that fluctuate if they have a variable, rather than fixed rates. In that case, should rates continue to rise over time, homeowners may face less borrowing potential and more financial strain. This means your loan balance could grow significantly by the end of your loan term. So, if your budget is tight, a reverse mortgage with variable rates may not be worth the unpredictability.
You’ll Own Less Equity in Your Property
Borrowing against your equity decreases the amount of equity you have in your home. This is one of the biggest problems with reverse mortgages, as you could be left with less to pass on to your heirs. Another negative effect of reduced home equity is that it could limit your options if you want to downsize later.
Shop Around for Lenders
Before you take out a reverse mortgage, look into multiple lenders and carefully consider their costs, repayment plans, and other terms. Find one that fits your needs and has terms you feel comfortable with based on your budget. Once you find the right lender, be sure to work with them to land on a custom plan that's best for you.
Know Your Loan Options
There are three main types of reverse mortgages:
- Home Equity Conversion Mortgages (HECMs): Most common and federally-insured
- Proprietary Reverse Mortgages: From private lenders and best for homes appraised at high values
- Single-Purpose Reverse Mortgages: From government and nonprofits, often the least expensive, and carry more limitations
Different costs and terms are associated with each of these loan options, so research them all to figure out which is right for you, your home, and your financial situation.
Trust the Experts
If you're still on the fence about taking out a reverse mortgage, get some advice! A good financial expert can advise you on the investment options that are suited for your circumstances. You can also take reverse mortgage counseling classes to gain more information.
Set a Realistic Budget & Safety Net
If you're particularly worried about the risk of overspending, have a backup plan. An emergency fund set aside to cover unexpected costs can potentially help you use less of your home loan over time. Taking a close look at your budget and ensuring it's realistic can also help you manage your funds well.
Borrow Only What You Need
The best way to avoid the reverse mortgage risk of overspending is to only borrow what you need. Rather than pulling out excess cash to have as a backup, stick to the amount that covers only the essentials so you're never tempted to overspend.
An Alternative to Reverse Mortgages
A reverse mortgage comes with a variety of risks, and it's not the right choice for everyone. If you don't meet the reverse mortgage requirements or you want a home equity alternative, consider Unison's Equity Sharing Home Loan.The Equity Sharing Home Loan is an interest-only, ten-year second mortgage with a shared appreciation component that offers homeowners the opportunity to tap into their equity with low monthly payments. With partially-deferred interest and below-market rates, Unison designed the loan to offer more flexibility for homeowners when it comes to managing their monthly finances. In fact, your monthly payments could be as low as half of what they would be with a traditional equity financing option, such as a HELOC.
If you’re looking for a way to tap into your equity but keep your monthly obligation low, learn more about Unison’s Equity Sharing Home Loan today!
The content on this page provides general consumer information. It is not legal or financial advice. Unison has provided these links for your convenience, but does not endorse and is not responsible for the content, links, privacy policy, or security policy of the other websites.
