The Pros and Cons of Reverse Mortgages
If you are “equity rich”, but “cash poor” and are in your senior years, you may want to consider getting a reverse mortgage. A reverse mortgage, or lifetime mortgage, is a loan available to senior homeowners who are at least 62 years of age and have substantial equity accumulated in their home. A reverse mortgage is a tool that many retirees use to provide a steady stream of cash during their “golden years”. These intensely debated, but widely popular loans come with many pros and cons.
A reverse mortgage is the right choice for many senior homeowners due to its number of benefits. One of the most significant advantages is that it provides you with a guaranteed source of tax-free income for life, while allowing you to remain in your home. The payment method is also flexible. For example, you can receive monthly payments, a lump sum payment, a line of credit — or some combination of all three. You also do not need to own your home fully to qualify for a reverse mortgage because most reverse mortgages only require 40 percent equity in your home. Further, the homeowner keeps ownership and title to the home.
The income from a reverse mortgage does not affect your eligibility for Social Security or Medicare either. You can cancel a reverse mortgage loan, but there is a three day window after the reverse mortgage closes to do so. Reverse mortgages usually have a provision that prohibits you from losing your home, provided you make property tax and insurance payments as well as necessary repairs. The “non-recourse” clause prevents your heirs from owing more than the value of the home.
Although there are many advantages to reverse mortgages, there are also a number of disadvantages that must be carefully considered. Reverse mortgages are not cheap. They come with considerable fees, including origination, mortgage insurance and closing costs. Because the entire reverse mortgage loan must be repaid when the borrower dies (or moves or sells his home), the equity in the home is decreased, reducing what is left to your children or grandchildren. In addition, your heirs will be responsible for paying back the balance due — plus interest — in the event of your death.
Property taxes, home owners insurance and repairs are still your responsibility. In the event that you are delinquent on any of these payments, you may be required to pay back your reverse mortgage early. Reverse mortgages are more binding than a line-of-credit and more costly too. Three days after the reverse mortgage loan closes, the loan is considered final. Although reverse mortgage loan refinancing is an option, it is challenging and costly. While reverse mortgage income does not affect your eligibility for Social Security or Medicare, it may affect your eligibility for Supplemental Social Security Benefits and Medicaid, depending on where you live and the amount of the loan.
The Bottom Line
All-in-all, reverse mortgages can be beneficial for many borrowers, but they are not the right choice for everyone. Before committing to a reverse mortgage, it’s important to fully understand all terms, costs, and advantages and disadvantages. It’s also wise to consider reverse mortgage alternatives, such as downsizing, relocating, refinancing, selling your home, or renting out a portion of your home.