What Are Reverse Mortgage Pros and Cons?

If you are at retirement age, or close to it, you may be seeing a lot of advertising for reverse mortgages. The ads can make these loans sound like a great option. And for some people, they are. If most of your wealth is in your house, it may make sense to get one of these loans. However, there are also downsides to them. Here are some of the pros and cons that may help you make your decision.

Reverse Mortgage Basics

If you own property, and you are 62 or older, a reverse mortgage makes it possible for you to borrow against the equity you have in your home. This may be cash, or it may be a line of credit. With this type of mortgage, you don’t repay the loan with monthly payments. The loan gets repaid when you are gone and your house is sold by your heirs.

There are different types of reverse mortgages, with the most popular type called the home equity conversion mortgage, or HECM. With this loan, you have the backing of the Federal Housing Administration. With this type of loan, you pay for insurance that is required for participation. To get this type of loan, you also need to have your house paid down quite a bit if not completely. You also have to use the home as your main residence. You have to be current on any federal debt, insurance, and taxes. There are also credit checks and other requirements such as attending an information session.

How Does It Work?

With a regular mortgage, a lump sum is given by the bank, and the borrower pays that amount back, along with interest, until it is completely paid off. With a reverse mortgage, the process is much different. Instead of you making payments, the payments get made to you. You can get a reverse mortgage that is a lump sum, or you can get it paid to you in monthly payments. There are also loans that are a combination of a lump sum plus payments.

The fees for the loan, and its interest, are included in each month’s balance. With this arrangement, how much you owe will increase as time goes on, and your amount of home equity will decrease. Throughout your reverse mortgage, you retain your home’s title, and there’s nothing due on the balance unless you pass away or move out of the house.

The Pros of a Reverse Mortgage

If you are having financial problems, getting a reverse mortgage can help you in a number of ways.

• If you are retired, or will be soon, a reverse mortgage is a good way to have some income during this time. This is especially helpful if your money is mostly in your home and you don’t have much in the way of liquid assets like investments or savings.
• This arrangement allows you to keep living in your home. You can get the cash you need from your equity, but you don’t have to sell your home. This prevents you from having to downsize or having to leave your neighborhood.
• You don’t have to have a fully-paid-off home in order to get a reverse mortgage. In fact, you can use the money from this loan to pay off your existing mortgage so that you can free up your money for other uses.
• If the price of your home falls and your home becomes worth less than what you owe on your reverse mortgage, you are protected in this event. Your heirs will not have to pay what is left over when the house is sold.
• Having a reverse mortgage is an income that you can count on, but it isn’t taxed. Because it is a loan instead of money that is legally considered income, there is no tax liability. While other distributions, such as from a 401(k), are taxed, your reverse mortgage payments aren’t.

The Cons of a Reverse Mortgage

There are also downsides to getting a reverse mortgage, so consider the cons as well as the pros before you make up your mind to get one.

• It is possible to have your home foreclosed on if you don’t keep up with the insurance, taxes, and other expenses required by living in your home. It can also happen because you move out of the home for most of the year, it can cause you to default on the loan and lose the house.
• The amount that you leave to your heirs could be less than it would have been without a reverse mortgage. If you get a lump sum from your loan or you live in it and get payments for a long time, your heirs may have no choice but to sell the home to repay the loan. This means little to no inheritance that could go on to build generational wealth.
• Getting a reverse mortgage isn’t free. You don’t have to make payments on the loan, but it still comes with expenses. You will still have to pay everything from insurance to taxes to HOA fees. However, there is yet more due. You will have to pay an insurance premium as well. This is generally about 2% of the value of your home. When you close on the loan, you will also have origination fees to pay. These costs can be rolled into the balance of your loan, but this would mean that you get less money.
• It can be complicated to get a reverse mortgage. They come with a lot of rules, so it’s important to thoroughly understand all of them. Always take the time to read through all of the rules so that you understand everything that is expected of you before you sign the papers.
• For your taxes, payments from a reverse mortgage aren’t income, but they can still affect your eligibility for government programs such as SSI and Medicaid. Be sure that you talk to a benefits specialist to ensure that you won’t be giving up your ability to qualify.

Before you can get a reverse mortgage, you need to get an appraisal. Contact us to find out more about a reverse mortgage appraisal.