Pros and Cons of Reverse Mortgages

If you are a homeowner who’s at least 62 years old and looking for ways to finance your retirement, you might be considering a reverse mortgage: a product which allows you to convert your home equity into money. Whether you’re looking for cash to cover healthcare expenses, pay off an existing mortgage or pay for a home improvement, a reverse mortgage can provide a line of credit or fixed monthly payments without the need to move or repay a loan at the end of every month. Although it sounds easy enough, you should keep in mind that deciding to get a reverse mortgage is a major financial decision which needs extensive research and careful consideration. To get you started, below are some of the main pros and cons of reverse mortgages.

Pros Of Reverse Mortgages

1. It enables the homeowner to live in his/her house for as long as he/she wants without any monthly mortgage payments.

2. The value of the home, not the current income of the homeowner is used to determine eligibility. The requirements that the homeowner must meet in order for him/her to be eligible for a reverse mortgage include, he/she must be at least sixty two years old, the house must be his/her primary residence and he/she must have paid off all or most of his/her traditional mortgage.

3. The owner of the home cannot be forced to move or sell his/her home, as long as it’s maintained and all fees and taxes are kept up to date.

4. The homeowner can still benefit from future increases in the value of his/her home, which can offset all or some of his/her borrowing costs.

5. The Reverse Mortgage Lenders have no claim on the homeowner’s other assets or income.

6. Income from a reverse mortgage isn’t taxable.

7. The homeowner can turn some of the value of your home into money, without having to sell it.

8. Depending on the provider, the funds can be received as regular payments, a lump sum or a combination of both regular payments and lump sum.

9. The proceeds received don’t directly affect Medicare and Social Security benefits.

10. The homeowner never owes more than the value of the house, even if the market price of the house declines after the homeowner secures the reverse mortgage.

Cons Of Reverse Mortgages

1. The owner of the home is still responsible for paying homeowner’s insurance, paying property taxes, and repairing and maintaining the home. The loan becomes due if the homeowner doesn’t pay the above expenses.

2. The upfront costs and interest rates are usually higher for reverse mortgages than for traditional mortgages. The upfront fees increase over time.

3. If a homeowner moves out of the house for a given period of time, for instance to a hospital or nursing home, the absence of the homeowner can be enough to trigger the requirement for repayment.

4. If the homeowner is currently or will be eligible for low income assistance from the state or federal government, the income from the reverse mortgage may disqualify him or her from the assistance.

5. Interest on the loan is compounded on the reverse mortgage and it cannot be deducted from the income taxes until it has been repaid.

6. If the only surviving borrower/owner dies, the loan must be re-paid before the title of the home is transferred to the heirs of the borrower.

7. As the equity in the home decreases with every payment, the homeowner may not have enough equity left for his or her future needs, or for his or her estate.

8. Because no payments are required in reverse mortgages, the interest on the loan compounds. The final balance of the loan can be many times the original amount of the loan. Despite the fact that a borrower can leave a home to heirs just like in any other home, there might be no or little equity remaining in the property after the balance of the reverse mortgage is repaid.

Although reverse mortgages serve as a good option through which many people can improve their finances when they are in retirement, they are not for everyone. If some of the above disadvantages apply to your specific case, you should take the time to carefully think through all relevant information about your situation before deciding to get a reverse mortgage. It still might be a viable option for you, but it’s important to know as much as you can before making a final decision.