The Disadvantages of a Mortgage

There are many types of loans available in the market today. One such loan is the reverse mortgage. It is in fact a mortgage where equity of the home or property gets converted into hard cash and can be used by the individual.
This type of mortgage is generally given to elderly citizens above 62 years of age to avail instant cash. Although beneficial in the short term it has many disadvantages which people realise later.

Every coin has two sides – a positive side and a negative side. Similarly reverse mortgage too has its advantages and disadvantages. Instant cash is an advantage which cannot be denied but there are other disadvantages which can’t be overlooked either.

The disadvantages of reverse mortgage are:

1. Fluctuating Interest Rate
The biggest disadvantage is fluctuating or variable rate of interest. It’s the kind of rate of interest which creates confusion over the exact amount to be paid to retrieve the home equity. A variable rate of interest can throw your calculations haywire.

2. Costlier than other loans
A reverse mortgage loan does not come cheap and is costlier as compared to other loans. It is based on a compound interest rate principle. In layman’s terms, the interest rate increases on a monthly basis. Eventually it can erode the property’s total equity.

3. Additional fees and charges
There are many fees and charges associated with a reverse mortgage like closing fees, servicing fees, origination costs, etc. These charges are quite substantial and one of the main reasons for the loan being costly. Plus there are many hidden charges that one might realise later.

4. Loss of Equity on Home
If there are payment defaults or if the tenure of the payment gets extended chances are that there could be a complete loss of equity on the house or property. To avoid this one has to choose a mortgage with a non recourse feature. This will ensure that you save on the equity of the house or property and have something saved for the next generations.
One should study both the advantages and disadvantages of reverse mortgage carefully before opting for it. Learn as much as you can about reverse mortgage and check for any hidden charges or clauses. This will help you to make the right decision without having to regret it later. Keep yourself updated with the latest market trends so that you are aware of all the pitfalls. In money matters it is always advisable to take your time and avoid hasty decisions.