You may be curious about reverse mortgages but — if you’re like most Americans — you probably wonder if pursuing a reverse mortgage is a smart decision.
Just like any major financial choice, reverse mortgages can be beneficial for specific situations. You simply need to weigh the pros and cons to determine if a reverse mortgage could be a useful way to secure your financial future.
Before making any commitment, it’s important to speak with a reverse mortgage specialist and a financial planning or retirement advisor.
But, in general, here are some pros and cons of reverse mortgages that may help you make an initial decision about whether to dive into a deeper conversation with an expert…
Pros of Reverse Mortgages
For senior homeowners (ages 62+) in the right situation, these are some of the benefits of reverse mortgages.
Take Advantage of Tax-Free Benefits
Since funds received from reverse mortgages are considered a loan and not income, the money you receive is not subject to taxes.
Receive Possible Tax Advantages
Speaking of taxes, you may be eligible to receive a tax deduction for your reverse mortgage, if you make voluntary payments totaling more than $600 per year. The exact amount needed to receive a tax deduction will vary based on your specific loan; consult with your lender for additional details.
Preserve Your Cash Balances
Assuming you have a conventional mortgage on your home, exchanging it for a reverse mortgage will preserve your cash balance.
With a conventional mortgage, you take money out of your bank account to pay the monthly mortgage payments. Your cash balance will go down and your home equity balance will increase. With a reverse mortgage (also known as an HECM), you don’t have to reduce your cash balance, because there is no required monthly payment; so your cash is preserved but your equity is reduced. In either case, your net worth is very close to the same amount.
Receive a Positive Payout or the Remaining Equity
When it’s time to sell, if your home’s value exceeds the outstanding loan balance, you or your heirs will receive the positive balance.
Choose How to Receive Your Proceeds
The funds from the loan can come in several different forms: a lump sum, monthly income, or a line of credit that you can draw on as needed.
Select a Maturity Payment Option
You can choose not to make monthly loan payments for the life of the loan, but if you choose to make a payment, you can reduce the loan interest and the amount you owe at maturity.
Use Your Funds as You Like
You have complete flexibility when it comes to how you use the funds you receive from your reverse mortgage, although some popular options include: covering general living expenses or healthcare costs and/or paying off outstanding loans, debts, liens, and judgments.
Be Assured of Your Home’s Value
If your HECM loan balance increases beyond the appraised value of your home at the time the loan needs to be repaid, you will not have to pay more than 95% of the property’s appraised value. Any remaining balance will be paid by the mortgage insurance that comes with all FHA-approved lenders in HECMs.
Cons of Reverse Mortgages
As with any financial resource or tool, reverse mortgages can have downsides. These might include…
Anticipate Ongoing Expenses
You must continue paying property taxes and homeowners insurance and keep the home in good condition for the life of the loan.
Potential Impact on Safety Net Eligibility
Depending on your situation, a reverse mortgage could jeopardize your eligibility for Medicaid or Supplemental Security Income (SSI).
Paying a Higher Interest Rate
The private reverse mortgage will collect interest at a higher rate than conventional loans for as long as the reverse mortgage remains outstanding, adding to your debt.
Residency Requirements
If you don’t intend to live in the home as your primary residence, you may want to reconsider pursuing a reverse mortgage. Under the requirements of a reverse mortgage, you must live in the home a minimum of six months and one day, per year. If you plan to be out of the home longer than that, you should contact your servicer to notify them. In some rare cases (such as the homeowners going on an extended vacation or a religious mission trip for longer than six months), exceptions may be made for this requirement — allowing the homeowner to avoid defaulting on their loan.
Potential Fees
Like a conventional mortgage, a reverse mortgage has fees and closing costs which will be deducted from the amount you receive.
Are Reverse Mortgages Bad?
You might be thinking, “What is the bottom line? Are reverse mortgages good or bad?”
The truth is that reverse mortgages are nuanced mechanisms. Whether a reverse mortgage is the right choice for you will depend on the particulars of your situation and financial circumstances.
Here are a few factors that could indicate that a reverse mortgage is right for you:
You Want to Stay in Your Home for a Long Time
Not only does a reverse mortgage accommodate those who want to stay in their home, it’s actually a loan requirement. It’s important that you are confident you will not want to relocate in a few years. If the homeowner expresses a desire to leave the home or move into a long-term care facility, then a reverse mortgage may not be the right decision.
Keeping the Home for Future Generations Isn’t Your Priority
Because the payoff you will receive from the reverse mortgage comes from the sale of your home at the time of loan maturity, reverse mortgages are not advised for those who want to keep a home within their family, unless there are other financial assets the family can use to help pay off the loan balance.
Consider whether this is an acceptable consequence for you, or if letting go of your family home is a prospect you do not want to consider.
You Need Additional Funds to Maintain Your Home
Reverse mortgages give you access to a lump sum of money, monthly income, or a line of credit to be drawn on as needed — provided you cover the cost of their home’s upkeep; this includes maintaining payments for homeowner insurance, home maintenance, homeowner association fees, and property taxes.
Be sure that you can cover all these expenses before you commit to a reverse mortgage, or you may have to forfeit the loan.
Learn More About Reverse Mortgages
Though it may take some time to understand the inner workings of reverse mortgages, carefully considering how this form of equity loan could affect your personal finances and life in retirement is an integral part of retirement planning.
Not only should you explore what a reverse mortgage is and how it works, but you should also consult a professional to learn how it could specifically affect you and your family.
Get in touch with a trusted Reverse Mortgage Specialist at Waterstone Mortgage to see if you might qualify for a reverse mortgage. It’s our goal to help senior citizens create a more financially stable and secure retirement.
These materials are not from HUD or FHA and were not approved by HUD or a government agency.
The only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage (HECM), and is only available through a Federal Housing Administration (FHA)-approved lender. Not all reverse mortgages are FHA insured. When the loan is due and payable, some or all of the equity in the property that is the subject of the reverse mortgage no longer belongs to borrowers, who may need to sell the home or otherwise repay the loan with interest from other proceeds. A lender may charge an origination fee, mortgage insurance premium, closing costs and servicing fees (added to the balance of the loan). The balance of the loan grows over time and you are charged interest on the balance. Borrowers are responsible for paying property taxes, homeowner’s insurance, maintenance, and related taxes (which may be substantial). There is no escrow account for disbursements of these payments. A set-aside account can be set up to pay taxes and insurance and may be required in some cases. Borrowers must occupy home as their primary residence and pay for ongoing maintenance; otherwise the loan becomes due and payable. The loan also becomes due and payable (and the property may be subject to a tax lien, other encumbrance, or foreclosure) when the last borrower, or eligible non-borrowing surviving spouse, dies, sells the home, permanently moves out, defaults on taxes, insurance payments, or maintenance, or does not otherwise comply with the loan terms. Interest is not tax-deductible until the loan is partially or fully repaid.
