Reverse Mortgage Pros and Cons

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Contributor, Benzinga
October 10, 2023

Reverse mortgages might seem confusing, but these types of loans offer opportunities for older people who need cash flow. Reverse mortgages provide borrowers or retirees with funds without requiring monthly payments. The structure offers people a way to obtain funds by accessing the equity in a primary residence. Before applying for a reverse mortgage, examine the pros and cons.

Reverse mortgages might seem confusing, but these types of loans offer opportunities for retirees and older people who need cash flow. Reverse mortgages provide borrowers with funds without requiring monthly payments. The structure offers people a way to obtain funds by accessing the equity in a primary residence. Before applying for a reverse mortgage, examine the pros and cons.

What Is a Reverse Mortgage?

A reverse mortgage is a mortgage loan designed to provide homeowners with access to the equity in their home. Homeowners access the equity using a loan secured by the property that yields monthly payments, a line of credit or a lump sum. This mortgage product is available for people age 62 or older who have a substantial amount of home equity.

How Do Reverse Mortgages Work?

Reverse mortgages convert home equity into cash. The loans offer people the opportunity for regular income because mortgage lenders provide payments to the homeowners. The process increases the amount of debt tied to a homeowner’s name as the amount of equity left in a property steadily decreases over time.

The reverse mortgage loan amount must be paid when a borrower sells the house or dies.

Reverse Mortgage Requirements

There are certain reverse mortgage requirements that must be met in order to qualify. By meeting these requirements, seniors can access the equity in their homes and use it to fund their retirement or cover unexpected expenses.

  • Borrowers must be at least 62 years old
  • Own their home outright or have a significant amount of equity in it
  • Property must be their primary residence
  • Undergo counseling from a HUD-approved counselor to ensure they understand the pros and cons of a reverse mortgage
  • Meet certain financial requirements, including having sufficient income and credit to maintain the property value and pay property taxes and insurance
  • Remaining mortgage balance on the property must be paid off
  • Pass the financial assessment by the mortgage lender

Possible Reverse Mortgage Pros

A reverse mortgage provides substantial benefits such as tax benefits and access to flexible funds.

Stay in Your Home Longer

A reverse mortgage helps you stay in your home longer because you do not need to make mortgage payments. A reverse mortgage offers access to funds that can be used to make payments on utilities and daily expenses such as groceries.

Have Additional Retirement Income

You can use the added income for necessities or to pay for fun activities that build memories with people you love.

Don’t Have to Pay Taxes on Income

According to the IRS, reverse mortgages are not taxable. The mortgages are loans — not income.

Protect Your Home's Value if Loan Balance Exceeds It

Consider buying mortgage insurance for a reverse mortgage to safeguard against balances exceeding the value of your home. Mortgage insurance helps cover the discrepancies between the value of a property and the loan amount. Usually, home insurance for a traditional loan protects the home while mortgage insurance is a safeguard for the lender.

Provide Options for Your Heirs

A reverse mortgage provides your heirs with the opportunity to keep or sell your home after you die. Heirs must repay the loan balance. Mortgage insurance can help protect heirs by allowing them to pay off the loan and keep the home without paying more than the home’s value.

Have the Ability to Purchase a New Home

A home equity conversion mortgage (HECM) can help you buy a new home. A HECM is a type of government-backed loan supported by the Federal Housing Administration (FHA) that is designed to allow seniors to purchase a new home while also getting a reverse mortgage. A HECM often requires homeowners to have homeowners insurance.

Speak with a reputable lender to learn about the opportunities available to you. Top reverse mortgage lenders have videos, blog posts, newsroom resources, housing market updates and educational tools to better inform potential borrowers.

Use Funds for Virtually Anything

You can enjoy the freedom that comes with extra retirement income. The funds can typically be used at your discretion.

Additional funding opportunities such as a home equity loan or a home equity line of credit (HELOC) also make it possible for homeowners to access cash using their home as collateral.

Possible Reverse Mortgage Cons

Although a reverse mortgage has multiple potential benefits, you should think about possible drawbacks before signing the paperwork. The loan increases the possibility of foreclosure and often decreases the inheritance available to heirs. Talk with a trusted mortgage professional to understand the opportunities available to you.

Requires High Equity

A reverse mortgage will likely be difficult to achieve for individuals with low equity or who do not own their home outright. Most reverse mortgages require at least 50% equity in a home for approval.

Pay Interest and Fees Over the Life of the Loan

The interest and total fees owed will steadily increase over time. Interest accrues monthly at fixed or variable rates.

Lose Your Home to Foreclosure

It’s possible to lose your home to foreclosure if you haven’t lived in the home for 12 straight months. For example, if you leave your primary residence and enter a care facility for a full year then it is possible to enter foreclosure.

Get Disqualified for Other Income Benefits

Taking out a reverse mortgage might disqualify you from other benefits. Benefits such as Medicaid and SSI might be impacted.

Have a Hard Time Navigating Changes to Your Status

Status changes could impact your reverse mortgage. For example, moving to a long-term care facility might change your status.

Reduce Your Heir's Inheritance

Reverse mortgages can decrease the amount of inheritance left to your heirs. For example, heirs need to pay off the reverse mortgage within a set window to keep the home and avoid foreclosure. Heirs have the choice to sell the property, refinance the property or pay for the property. To keep the property, they need to pay the loan balance.

Can Be Complicated

The process of navigating a reverse mortgage can be time-consuming and complicated. The fees and complex structure can create difficulties if not properly understood.

Reverse Mortgage Lenders

Personal Choice: What Can a Reverse Mortgage Do for You?

Reverse mortgages are a personal choice that seniors with enough amount of equity or who own a property outright might consider. Weigh the benefits and drawbacks to understand how the possible risks could impact your future. Although a reverse mortgage offers homeowners the freedom to use funds at their discretion the loan also creates vulnerabilities.

For risk-averse individuals, the potential downsides could outweigh the benefits. In contrast, a reverse mortgage can prove beneficial for homeowners who need monthly cash flow. Reach out to legal and loan professionals to have a better grasp of the options available to you.

Frequently Asked Questions

Q

Who benefits the most from a reverse mortgage?

A

Financially stable borrowers have the most to gain from a reverse mortgage. A reverse mortgage offers additional financial flexibility that can be used to attain regular cash flow.

Q

What type of borrower is ideal for a reverse mortgage?

A

People over 62 years of age with a primary residence who are not interested in moving or selling can be ideal candidates for a reverse mortgage.

Q

How many years is a reverse mortgage good for?

A

A reverse mortgage does not have a set expiration timeline but needs to be paid off when the borrower dies or moves out.

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