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Reverse Mortgage Downfalls—Think Before You Dive In

Reverse mortgages are often a last resort for seniors struggling financially or sometimes a part of a solid retirement plan. The benefits sound almost too good to be true—you get to live in your current home while still receiving payment for the equity of that same home. What people often do not seem to realize, though, is that this money has to come from somewhere. This means that there has to be some sort of loss that you will have to incur to make up for the money you will receive.

On top of this, there are simply some other downsides to reverse mortgaging. Although these plans can be incredibly enticing and even beneficial in many situations, you may want to avoid them for a host of reasons. Read on if you are wondering what downsides reverse mortgages have.

What Happens to My Estate?

The entire mechanism of reverse mortgaging revolves around the fact that you are essentially selling off equity that is built up in your home over time. This does not mean that you have to have your loans totally paid off; you can use the proceeds from a reverse mortgage to pay the rest of your loans. That being said, when you sell equity in your home, it is obviously no longer yours.

Although reverse mortgages allow you to stay in your home while receiving payments, you lose possession of the home upon moving out or dying. The bank then sells your home to make up for the money they have been paying for you. If you are not planning on leaving a legacy or have no heirs this may be fine, but if you are set on passing down your estate or the money tied into it to your children then this may be upsetting news. They will still have the first opportunity to purchase the house, though.

Some Other Concerns

One of the most overlooked drawbacks of reverse mortgaging is the cost associated with setting it up. There are often very steep origination fees, and you will also have to pay interest on the money you have received. Once it is all said and done, you may end up being surprised how little money you end up making. While it will still be a substantial amount, you will receive less than half of the value of your equity before factoring in the aforementioned fees.

Lastly, you still have to maintain your house. Besides the obvious—such as replacing and repairing broken or otherwise nonfunctioning items in your house—you will have to pay for things such as property tax and homeowners insurance. While this seems like a no-brainer, many people often overlook this step and fail to realize that they will have to continue to pay for these sorts of things. Reverse mortgages are often used to cover these costs, but that just adds into the fact that you will most likely not end up with as much extra cash as you originally thought after getting a reverse mortgage.

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