The dangers of reverse mortgages

Reverse mortgages are often used by retirees who have not saved enough or do not receive enough from Social Security to be able to live comfortably during their retirement years. Many do not save enough because they think of their homes as being additional savings, but to access that money you either have to sell your home or borrow against its worth. This is where reverse mortgages come in.

To put it simply, reverse mortgages are complicated. A reverse mortgage is a way to put cash in your hand by borrowing against the equity in your home, but it puts your home at risk. A reverse mortgage is a loan that you must pay back. While you do not have to make regular payments on this loan, the amount of the loan is due in full when the last borrower leaves the home. As such, if you plan on leaving the home to your children or heirs as an inheritance, they may be forced to pay off the loan as well as accumulated interest or else lenders could foreclose on the home.

Additionally, reverse mortgages function on compound interest, which can build up surprisingly fast. Because of this, people can end up owing far more than they expect in order to keep their home. With compound interest, the interest on the principal loan is calculated every month, and that amount is added to the principal of the loan. This means that for month 2, you will be paying interest on the principal loan AND on the interest from month one — you’ll be paying interest on your interest!

Because of the dangerous and complicated nature of reverse mortgages, debtors should never look to pay off credit cards, payday loans, medical bills, or similar debts by taking out a reverse mortgage. Due to strong homestead laws in Texas, these types of lenders cannot take your home even if they have a judgment against you. However, this is not necessarily true of reverse mortgage lenders. If you get a reverse mortgage to pay off other types of debt, you may put yourself at risk of losing your home.

If you or a loved one is struggling with debt, speak with Killeen bankruptcy attorney Erin B. Shank, PC, about your best options for getting out of debt while still keeping your home. To discuss the specifics of your situation, call our offices at (254) 296-1161 today.

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