The Downside Of Reverse Mortgage

It is a known fact that owing money, in any kind of form, either mortgage or simple loan can be a recipe for a future financial trouble. Mortgages are particularly infamous because they tend to be expensive and often lead to home foreclosure and other collateral damage. Reverse mortgage is equally expensive, but does not actually result to the property being confiscated.

Reverse mortgage follows an inverted pattern of financial allotment and payments. In normal loan transactions, the borrower receives a fixed amount of money in a form of a lump sum or monthly amortization. Subsequently, the borrower must return the payment at a specified date or at determined increments, both with computed interests. On the other hand, in a reverse mortgage, the borrower receives a lump sum or a monthly allotment from the mortgage holder. The interest in placed upon the home equity and it continues to grow until the house is sold. In essence, the borrower remains in debt until the house is sold or he passes away, whichever comes first.

It is actually kind of a morbid arrangement because the finality of the agreement will entail either of the two most stressing life episodes. The borrower will definitely not appreciate his relief from debt if he has already passed away, nor would he if his beloved family home is sold—unless he does have unpleasant memories from it. Additionally, the expiration of the borrower does not automatically result to the conclusion of the mortgage contract. As with most estates, the heirs will inherit the reverse mortgage contract, and they have the option to continue its pecuniary benefits or cancel it. If the heirs decide to cancel it, they will have to move out and sell the house. 

The mortgage is bound to the home equity and the interest is directly proportional to the length of time the mortgage was in effect. For instance, the borrower decides to sign up for a reverse mortgage shortly after his retirement at 62 and he expires at 92, the computation of the interest will run for 30 years. If his heirs decide to continue the mortgage for another year then it will be computed against 31 years. Now imagine how huge the interest rates will be for a 31-year mortgage. To pay off the mortgage, the proceeds of the sold house will be used to cover for the entire expense. 

Before taking out a reverse mortgage, the house owner must have thorough understanding of the ramifications of this arrangement. One must also be prepared to lose their home in their old age, because as it is, the contract is bound to the ownership of the property. This is a family institution that is at stake, and there is just no way to get it paid without losing the property.  It may not be confiscated, but the homeowner will be coerced to let it go, and that can cause emotional stress. It is best to shop around for better options and let this be the last resort.
