Pros and Cons of a Reverse Mortgage

Reverse mortgages have been around for a long time, but in recent years they have become more popular. Though some experts consider a reverse mortgage a last resort of sorts, depending on your own financial situation, a reverse mortgage may be helpful.

If you’re not familiar with reverse mortgages, they fall into the home equity loan category and are designed exclusively for homeowners ages 62 or older. With a reverse mortgage, payments are made to the homeowner based on the amount of home equity that has accumulated. Reverse mortgages do not need to be repaid while the homeowner is still in the house. Instead the loan is repaid when the homeowner either leaves the home or dies and the home is sold.

Like any mortgage, homeowners applying for a reverse mortgage must qualify, and must also be current on property taxes and homeowner’s insurance. Single-family, two or four-unit homes and both condos and manufactured homes qualify for a reverse mortgage.  

Like anything, reverse mortgages have both pros and cons. Here are some of the pros,

• Taking out a reverse mortgage eliminates the need to make a monthly mortgage payment. This can be particularly important for retirees on a fixed income.
• Funds received from a reverse mortgage can help to pay off accumulated debt or an unexpected expense.  It can also improve cash flow.
• Those with a reverse mortgage can continue to live in their home as long as they wish, retaining the title to the home as well.
• There are a variety of ways to receive reverse mortgage funds, depending on the type of loan, including as a lump sum payment, as a line of credit that can be accessed when needed, or as a regular monthly payment.
• All closing costs can be financed into the loan, making out-of-pocket expenses minimal.
• Funds received from a reverse mortgage are typically not considered taxable income, though it’s best to consult a tax professional.

Reverse mortgages are best suited to homeowners who do not plan to move and are able to afford the regular cost of maintaining their home, such as property taxes and insurance.  

While there are plenty of benefits to a reverse mortgage, there are also some cons, which include the following:

• Both age and home value play a role in how much money you can receive in a reverse mortgage, with older homeowners and more expensive homes receiving more funds.
• The loan value increases over time, as both principal and interest accumulate.
• Fees are typically higher for reverse mortgages, although there is an option (mentioned above) to finance all closing costs and fees directly into the loan.  
• A reverse mortgage lowers the value of your estate considerably, leaving you with fewer assets to leave to your heirs.
• If you have to move out of your home for any reason, the loan becomes due, meaning any stay in a nursing home or assisted living center for more than one year will cause the loan to become due.
• If you do fall behind on home upkeep or property taxes, the home can be foreclosed.

Anyone who is considering a reverse mortgage must meet with and receive counseling from an independent agency approved by the U.S. Department of Housing and Urban Development (HUD). Like anything, it is best to consider all options before applying for a reverse mortgage.