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Although reverse mortgages are touted as the be all and end all method for seniors to receive a steady income stream by tapping the equity in their homes, there are dangers of reverse mortgages that anyone contemplating one should be aware of.

What are some of the dangers of reverse mortgages?

Reverse Mortgage Danger Num. 1 -
Well, in the first place you should be aware that the amount you receive will probably be less than you are shown in the initial calculations. This is because unlike a traditional mortgage, where the taxes, insurance, and fees are paid by monies you paid into an escrow account when you write your mortgage check. With a reverse mortgage on the other hand, it actually works, drum roll please, in reverse. The money for those items is subtracted from the amount the mortgage holder receives for their monthly payment, thereby reducing the net amount of the money you'll get each month. Be aware of this when you are making your calculations.

Reverse Mortgage Danger Num 2 -
Another danger of a reverse mortgage goes to the actual structure of the loan. As it is stated in most of the loan documentation, you will retain use of your property as long it is your primary residence. The problem is that, as reverse mortgage holders are senior citizens, the chances are fairly great that they may do one of two things that could cost them their home.

One is to be confined to an assisted care facility. At this point the home is no longer their primary residence and the bank will come for their money. If the balance is less than the home equity, the home will be sold and the equity beyond what is owed on the reverse mortgage will be given to the homeowner. If the balance is greater than the home will simply be forfeit to the lender to satisfy the terms of the loan.

The other condition that could trigger the primary residence provision is that the homeowner could move for much of the year to a second home. This is very common for seniors living in northern states. They will purchase second homes in warmer climes, such as California, Florida or Arizona, where they can relax in the sun. If they take their relaxing a bit too seriously however, they could find themselves in a situation where their home is no longer considered their primary residence.

Reverse Mortgage Danger Num 3 -
Another danger of a reverse mortgage is getting sucked into paying high fees or getting bad ARMs. Many reverse mortgages are adjustable rate mortgages. Many people are well aware of the dangers of these type of mortgages as they've occupied more than their fair share of the evening news for the last year. The same problems can apply for reverse mortgages as for traditional mortgages. You can easily be risking your security with the uncertainty of a reverse ARM. Personally, I may just be too conservative, but I like the old fashioned way, fixed.

Another point to be aware of is that the FHA will charge a 2% fee to insure reverse mortgages. But the real thing to watch out for is that you may be asked to pay even higher fees and closing costs than you would with a traditional mortgage. Don't do that, because many lenders will offer basically the same fee structure with a reverse mortgage.

Reverse Mortgage Danger Num 4 -
Another danger of reverse mortgages is that they let you spend your home's equity on just about anything you want to. This could cause a problems if you need those funds for an emergency down the road. While there's nothing wrong with living it up a bit in one's golden years, be aware of the temptation to splurge with all your reverse mortgage payments on trips to Mexico or a new Prevost to impress the folks in Arizona. Keep your eye on the future and remember that the money from the reverse mortgage could allow you to keep your independence at home should you or your spouse's health take a turn for the worse in the future.

A reverse mortgage can be a great financial vehicle to carry you through your golden years in relative financial security. Just be aware that there are dangers to reverse mortgages, just as with any other financial products