First of all, a reverse option mortgage, while it gives you extra spending money, is still another debt you’ll eventually incur. You’ve worked hard to pay off the balance on your home, and applying for a reverse mortgage will effectively bring that debt upon you again, even though it doesn’t have to be immediately repaid. True, you or your heirs don’t have to repay until you pass away or the home is sold, but the fact remains that it’s not free money, it does accrue interest, and it will eventually be paid back in full.
Secondly, a reverse mortgage will decrease the value of the home when it comes time to sell it. Let’s explain what this means. If you sell the home, the proceeds from the sale must be used to pay off the reverse mortgage first. For example, if you take out the mortgage for $50,000 and the home is sold for $60,000, you only keep $10,000 because the mortgage must be paid first, just like in a regular mortgage situation. This means that you’ll receive much less from the sale than you were hoping for. On the other hand, if the home were already paid off and you didn’t choose to take out the reverse option, you would keep 100% of the proceeds.
Last of all, a reverse option mortgage can be disadvantageous because of the burden it would place on your heirs if you passed away. As you’re likely aware, the money does not have to be repaid until you die, if you choose to remain in the home for the rest of your life. But have you paused to consider if your heirs are really able to pay back such a large amount? Of course, the proceeds from the sale of the house would help, but what if they need to use some of that money for other expenses like your funeral? Or what if the home were never sold at all? Even if you took out a small reverse mortgage of $10,000, are your children really able to pay back such a large amount on their own?
These are a few disadvantages to seriously consider before applying for a reverse mortgage.
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