The significant advantage of reverse mortgages is clear. This financial tool enables seniors to make use of their home equity in order to increase their standards of living in their senior years which are often characterized by a shortage of liquidated financial resources. This is especially valuable when other family members are unable or refuse to aid the senior with his financial situation.
A reverse mortgage requires no guarantees on the side of the borrower aside from the property itself.
Another advantage of reverse mortgages is that it enables seniors to support other family members today instead of as an heirloom. It enables seniors to decide how and when to aid the potential heirs and is especially valuable when seniors still support their families.
A reverse mortgage might also assist financing required payments for health care or nursing and also help finance the move to a retirement home.
Last but not least a reverse mortgage is a great solution to avoid taxes on payments made to the borrower.
Although reverse mortgages have many advantages considering and understanding the disadvantages of a reverse mortgage is highly important as they are no less significant.
One of the primary disadvantages is that family members might often requires financial assistance with either buying a house, college funds or more. In case of a lump sum reverse mortgage the senior might find himself spending the money unwisely as one might not be accustomed to receiving a large sum of money at once.
As the debt compounds with time it is more then possible that at repayment most of the property’s value will be used to repay the loan leaving only a fraction of the original value to the heirs.
Generally, reverse mortgages tend to be more costly then regular ones as they are rising debt loans with interest added to the principal loan balance each month.
There are other alternatives then reverse mortgages. Some might be more financially sound. A senior should consider selling the property himself and rent an apartment instead and by doing so save the compounding interest and make his decisions regardless of a loan to be repaid. This is quite difficult; however, as most seniors would prefer to remain in what has been their home for many years.
One should also consider the relatively high rates paid for closing a reverse mortgages, often a percent of the property’s value. As a result a reverse mortgage is not suitable for seniors who intend to leave their home in the near future (3 years being the rule of thumb).