Understanding Reverse Mortgage Complaints: Risks & Disadvantages

Reverse mortgages are a type of mortgage that allows people to live in their houses and retain ownership, while receiving an immediate loan amount for the equity in their homes. These reverse mortgages are common among the elderly who own their homes but need extra money to pay for medical expenses or other costs. Many reverse mortgages can only be borrowed by those over the age of 62. Reverse mortgages come with disadvantages, and there are several common complaints.

Costs

Reverse mortgages tend to cost more than normal mortgages or other loans when comparing necessary payments. With a reverse mortgage, no payments are necessary for a certain length of time (until the borrower's death, for instance). However, the mortgage rate still has a hidden interest rate that gathers the lender profit over this timeframe. The interest rate is compounded, adding in again a percentage of the mortgage amount plus all previous interest payments.

Equity Problems

Another very common complaint with reverse mortgages is the effect they have on equity. House equity is an unsure thing -- the value of a home can rise and fall with the market. When the borrower dies, his house is sold to pay off the loan, but if the equity in the house is low, heirs may receive no money from the transaction. If the equity has fallen too far, then heirs may even owe the lender additional payments.

Fees

Reverse mortgages have been victim to scam-like arrangements regarding fees. There are common mortgage fees involved, such as processing fees, origination fees, and closing costs, which can add up to thousands of dollars. However, unscrupulous companies require unwarranted fees for inspecting houses for the possibility of a reverse mortgage without actually agreeing to anything.

Responsibility

Borrowers who create a reverse mortgage may find themselves in a difficult place of responsibility. The lender may technically own the house in the future, but until then the borrower still owns the property and must maintain it. She is still responsible for all property taxes and utility bills.