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Pros and Cons of a Reverse Mortgage
Advantages – Pros
- A reverse mortgage allows people 62 years or older to remain in their home.
- Reverse mortgages can be set up as a monthly payment, line of credit, lump sum payment—or a combination of these.
- You can use a reverse mortgage (HECM for purchase) to buy a house;
- No matter how the reverse mortgage is set up, no monthly payment is due from the home owner unless he or she dies, moves or sells the home. At that time, the loan is due in full, plus interest and fees.
- The home owner can receive a guaranteed source of tax-free income from a reverse mortgage as long as he or she lives in the home as a primary residence. A home owner could potentially continue to receive monthly payments even after the loan balance is higher than the amount that the house is worth.
- Neither the home owner nor his or her heirs will ever owe more than the home is worth, no matter how long the borrower lives in the house.
- It’s fairly easy to qualify for this loan since credit scores, employment, and income are not part of the qualification process.
- You cannot owe more than the value of your home at the time of repayment, no matter your balance.
- If the reverse mortgage balance is less than the value of your home at the point of repayment, your heirs get to keep the difference.
- The loan can be repaid without selling your home.
- Reverse mortgage income will not impact your Medicare and Social Security eligibility.
- Ownership and title of the home remain in your name.
- You are required to speak with a reverse mortgage counselor before obtaining the loan.
- You can cancel the loan for any reason (right of rescission) during the three day period after your reverse mortgage closes.
- Limited income and fixed income is a common impetus behind reverse mortgage inquiries. Eliminating the mortgage payment in favor of augmenting monthly income via home equity provides a financial cushion, making resources available for long-term healthcare insurance, medical expenses, home repair, debt reduction and recreational activities. The money you receive is tax-free.
- Your credit score has no bearing on your eligibility for a reverse home equity loan nor affect the calculation of your loan value. Your home value is based on your age, current interest rates and property value.
- The HECM is FHA insured and therefore, the borrower is guaranteed to always have the funds available to them, and if the lender does not pay funds to the homeowner in a timely manner, the lender owes the homeowner a late charge!
Disadvantages- Cons
- The counseling is mandatory and there is no opting out. Every potential borrow must go through counseling. This adds time and cost to the process. However, these are complex loans and this is a measure of consumer protection.
- Any balance remaining on your first mortgage will be included in the balance of your reverse mortgage.
- The loan has to be repaid when you die, sell your home, or no longer use it as your primary residence. Your heirs will have to pay off the balance plus interest when the loan term ends. Repayment on a reverse mortgage can be through the sale of the home.
- There are caps on how much you can borrow with most reverse mortgage programs.
- Repaying the Loan: Unlike a traditional mortgage, the interest on a reverse mortgage isn’t tax deductible until the loan is paid off.
- Terminology: A lot of real estate terminology is used when referring to a reverse mortgage. You’ll hear it from your reverse mortgage counselor, lender, financial advisors and family members.
- Fees: The fees associated with a reverse mortgage are slightly higher than that of the traditional forward mortgage loan that you likely used to purchase your home. The good news is that you can usually pay the fees with the loan itself, which many borrowers end up doing. Also, the Federal Truth in Lending Act requires reverse mortgage lenders to fully disclose all of the costs and terms associated with the reverse home equity loan.
- Property tax and insurance: You are responsible for paying for your property tax and insurance. You can always use the income from the reverse mortgage to pay for it. If you fail to pay your property tax and/or insurance, you may be required to payback the loan earlier. Currently there are no escrow accounts available for payment of taxes and insurance as there is with the forward mortgage.
- Age: Reverse mortgages are limited to those who are 62 years old or older. Unfortunately, if you’re 61 and ˝, you still will not qualify for the loan.
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