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Reverse Mortgages: Pros and Cons

Quick question! How does a reverse mortgage work? For seniors, letting your home pay you a monthly retirement income is certainly an option. In a word, it’s an easy way for you to get cash.

But then, here’s the concern, “is it really that great?” Let’s say, with proper planning, a reverse mortgage can be beneficial.

In this post, we’ll cover the basics and the most significant reverse mortgage pro and cons.

What Exactly Is a Reverse Mortgage?

A reverse mortgage is a loan given to homeowners that are 62 years and above. It’s also for those with positive home equity—this is to mean seniors who have cleared their regular mortgage. Besides the age requirement, qualifying for a reverse mortgage require you to:

  • Use the home as a primary place of residence
  • Have a good credit score
  • Not be a delinquent
  • Stay on top of your property taxes and HOA fees, and other costs

How Does a Reverse Mortgage Work?

As with any loan, several rules exist to protect the lender and borrower. You may choose to receive the funds using either of these three options

  • A lump sum - This option lets you receive the entire loan at once at a fixed interest rate.
  • Line of credit - Here, you’ll only borrow when a need arises. This loan type has a variable interest rate.
  • Monthly payments - This option means you’ll receive monthly payments at an adjustable interest rate.

Aside from the funding options, three types of reverse mortgages exist.

  • Home equity conversion mortgage
  • Single reverse mortgage
  • Proprietary reverse mortgage

Reverse Mortgage Pros

1.  Addresses the financial struggles that come with retirement

For a retiree who’s grappling with living expenses, then a reverse mortgage can ensure you’re not completely broke and miserable during retirement. Note that the amount you may borrow depends on the age of the youngest of the two borrowers, your property’s value, and the present interest rates. The  Federal Housing Administration (FHA) will only consider your home equity if you’ve cleared most of your regular mortgage.

2.  The loan is not taxable

A reverse mortgage is tax-free. Who knew the taxman could be lenient? The IRS qualifies a reverse mortgage as a loan hence not taxable income. This factor matters to a retiree as it also protects your social security benefits.

3.  The government has got your back

A significant concern for homeowners is what to do when the house value decreases. Well lucky for you, the government has got your back. FHA finances the price difference for a house sold at 95% of the estimated value. Besides that, while you might have to sell your home in the event you fail to meet the obligations, a reverse mortgage will save you from paying exorbitant bills.

4.  The repayment schedule is a breeze

Unless you stop living in that house, decide to sell your property, or die, repayment of your reverse mortgage is a hassle-free process with no expectations to repay your loan early.

Reverse Mortgage Cons

1.  62 and above

Who knew loans could be this exclusive? Reverse mortgages require you to be atleast 62. Plus, if your spouse is below this age requirement, getting a loan can be challenging.

Typically, your best option here would be to deed the home to the qualifying partner. But again, this could have repercussions. For instance, it could disqualify you from the FHA insurance coverage, leaving you and your partner unprotected.

2.  It comes with specific costs

At first glance, a reverse mortgage seems uncomplicated. However, upon careful review, you’ll realize the costs associated with this tax-free loan. These include:

  • Mortgage insurance - You’ll need to pay an initial premium of 2% and 0.5% annually.
  • Closing costs - These costs vary per lender and can often be very high.
  • Origination fees - You might have to cough up thousands in origination fees
  • Servicing fees

3.  You might not be able to pass your home to your heirs

Upon death, your family must pay off the home loan in full or atleast 95% of the value. First, this might mean selling the house or transferring ownership to the lender to settle the reverse mortgage. Aside from that concern, this home loan also burns through your home equity. So, even if you end up repaying the loan, it might not have positive equity.

4.  The reverse mortgage 12-months rule

Reverse mortgages don’t discriminate. So, don’t expect to get a pass for being sick. Whatever the reason, being away from your house for more than 12 months means early repayment. Most times, this would require selling the house to pay off this home loan.

5.  A reverse mortgage puts you at risk of a foreclosure

A reverse mortgage does not excuse you from property taxes, maintenance fees, among others. Failure to pay these costs could result in foreclosure. Some lenders can funnel a portion of the loan to cover these costs. Even so, it’s not always a guarantee that these set-aside accounts will always meet the applicable fees.

Reach Out to a Mortgage Expert

Now you know. A reverse mortgage is a hassle-free way to get cash. Yet, it’s also an option that requires careful consideration. Remember, a reverse mortgage shouldn’t cause you sleepless nights or hair loss. Be sure to talk to a mortgage expert. Such a plan equips you with the best information to help you make the right decision.

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