Although the reverse mortgage is one of the most highly advertised methods of cashing in on equity, it may not be one of the smartest moves for you. Take a look at some of the disadvantages of a reverse mortgage before you dive headfirst into one.
You lose equity when you engage in a reverse mortgage.
If you are looking to maximize the equity that you have in your home, a straight sell or a loan against the equity will do that. A reverse mortgage company only makes money if it is able to give you less money than the property is worth. As such, they will always look to discard a portion of your equity by hitting you with fees or having your house appraised for less money than it is worth.
You may lose your home.
Although the advertisements that flout the reverse mortgage say nothing of the risk of the financial vehicle, there is a great deal of risk. If you fall behind on your loan or your equity gets lost, then you may be in for a big surprise when the bank that you partnered with suddenly wants to take your home out from under you.
The true downside to a reverse mortgage is that if you fall behind, you likely will not have the money to catch up without an outside loan. In order to work, a reverse mortgage needs a great deal of stability.
You may outlive the loan.
The reverse mortgage is only meant to last for a specific period of time. Once the well is dry, there is no more money to be had from the equity that is in your home. You may outlive this entire process. What will you do in that case? There are other options, but once you use up all of your equity at the end of your reverse mortgage loan, then you will not have any leverage to make a deal.
For the most part, a reverse mortgage only creates a positive situation when the market is stable, your interest rate is low and your put a limit on the amount of years that you will borrow.
Remember that a reverse mortgage is a loan at its core. You are giving up equity in your home, and if the loan is not paid back, the bank will take over the property. Although this may not seem like a huge punishment to you, it can mean a great deal to your legacy. There are other options that will give you more money for your retirement and allow you to create wealth for your descendants.