What are the Pros & Cons of a Reverse Mortgage?
A reverse mortgage can be a powerful financial tool. However, as with all mortgages, it’s important for a borrower to make an informed decision. Let’s dive into some of the benefits and caveats of reverse mortgages to help you make the best decision for your needs.
Is a Reverse Mortgage a Good Idea?
There are many ways a reverse mortgage can help those nearing retirement age. But a reverse mortgage may not be right for everyone. It’s important to consider the pros and cons of the program to make sure it’s a good fit for you.
Reverse Mortgage Pros
- Converts your home’s equity into tax-free cash
- Loan proceeds can be used for anything
- Remain in your home for as long as you’d like
- Reverse income is tax-free and usually won’t impact Social Security or Medicare benefits
- Pay off your existing mortgage and eliminate monthly mortgage payments*
- This is a non-recourse loan which means you will never owe more than the home is worth
- Government insured program
- Repayment isn’t required until you permanently move, sell, or pass away
Reverse Mortgage Cons
- Reverse mortgages come with higher costs and fees than traditional mortgages
- A reverse mortgage reduces the equity in your home
- Must continue to maintain home.
- Must pay property taxes, insurance, and home owner’s association fees
- May impact retirement benefits like Medicaid or Supplemental Security Income (SSI)
*Borrowers must maintain the property and keep current property taxes, homeowner’s insurance and HOA dues.
Reverse Mortgage Benefits
Let’s take an in-depth look at the benefits of a reverse mortgage.
Convert Your Home’s Equity into Cash
According to the U.S. Census Bureau, nearly 80% of older adults aged 65+ own their homes, with the average amount of home equity sitting at $143,500. However, it wasn’t until 1988, after the introduction of reverse mortgages that homeowners could tap into their home’s equity and turn it into cash.
Use the Funds for Anything
There are very few limitations on how you can spend the funds from a reverse mortgage. Common options include:
- Supplementing Social Security income
- Paying for medical expenses or financing in home care
- Making home improvements
- Eliminating monthly mortgage payments
- Consolidating debt**
- Living inheritance for your heirs
- Purchasing a new home
**Debt consolidation does not pay off the debt, please consult a financial advisor regarding the effect of consolidating short-term debt into long-term debt.
Remain in Your Home
After taking out a reverse mortgage, you retain the title to your home and can live in it as long as you continue fulfilling the loan obligations. This means you must maintain the property and continue paying taxes, home owner’s insurance, and home owner association (HOA) fees.
Tax Benefits
Reverse mortgage payments are considered loan proceeds instead of income, which means they aren’t taxable. However, you cannot deduct interest accrued on a reverse mortgage until you sell the property.
While reverse mortgage funds aren’t taxable and won’t impact Social Security or Medicare benefits, it’s always a good idea to speak with a tax professional before taking out a reverse mortgage.
Pay Off Your Existing Mortgage
Reverse mortgage proceeds are first used to pay off any existing mortgage balance or liens. This enables the most well-known benefit of a reverse mortgage: no more mandatory mortgage payments on your home.
Non-Recourse Loan
A reverse mortgage is a non-recourse loan, which means you can never owe more than your home is worth.
Government Insured Reverse Program
A Home Equity Conversion Mortgage (HECM) is the only reverse mortgage insured by the U.S. Federal Government. To get a HECM, you must go through a HUD-approved lender. Because it is backed by the U.S. Government, a HECM offers more protections for reverse borrowers.
Delayed Repayment
In most instances, you (or your heirs) don’t have to repay a reverse mortgage until all borrowers have permanently moved, sold the home, or passed away.
Would you prefer to talk through the advantages and disadvantages with an expert?
Our team is ready to learn about your unique situation and discuss your options with you. Reach out to us today!
Disadvantages of a Reverse Mortgage
There are a few reverse mortgage disadvantages you should also keep in mind:
Financing Costs and Fees
Like a traditional mortgage, reverse mortgages come with multiple costs and fees, including:
- Origination fees — These cannot exceed $6,000 and vary based on your home value
- Closing costs – These include appraisal, title search, surveys, inspections, recording fees, mortgage taxes, and credit checks – just like a traditional mortgage
- Mortgage insurance — Reverse mortgages come with an upfront fee for mortgage insurance which is paid to the Federal Housing Administration (FHA), plus a yearly FHA fee of .5%
Many of these costs may be rolled into the reverse mortgage instead of being paid out of pocket.
Potential for Reduced Equity
While tapping into home equity can solve many financial problems for those of retirement age, it’s important to emphasize that with each payout you receive from the reverse mortgage, equity in the home is reduced. Interest is also added to the balance with each payout, which means you will owe more as time progresses. However, the non-recourse feature of the reverse mortgage protects the borrowers and their heirs from ever owing more than the home’s value when the loan becomes due – even if the home’s value is less than the loan balance for any reason.
It is important to note that borrowers may make voluntary payments towards the balance of their loan if they choose to reduce the risk of losing equity in the home over the life of the loan.
You Still Have Responsibilities
To remain in your home, reverse mortgage lenders require that you:
- Pay property taxes and home owner’s insurance throughout the life of the loan
- Keep your home and keep it in good condition
- Occupy the home as your primary residence
If you fail to adhere to these obligations, the lender may have the right to foreclose.
Retirement Benefits
Although funds from a reverse mortgage won’t affect Social Security or Medicare benefits, they could impact retirement benefits like Medicaid or Supplemental Security Income (SSI). Again, it’s always wise to consult with a tax professional before taking out a reverse mortgage.
Reverse Mortgage Considerations
In addition to the above, there are a few scenarios you might run into throughout the reverse mortgage process. Here are some of the most common:
- Adjustable interest rate — Interest accrues on any funds you withdraw from a reverse mortgage. Fixed interest rates grow at a steady pace, whereas adjustable interest rates could increase your debt and decrease your equity at a faster rate.
- Outliving your reverse mortgage — If you don’t plan ahead, you could spend all your reverse mortgage loan proceeds before you pass away.
Is a Reverse Mortgage Right for Me?
If you have substantial equity in your home, a reverse mortgage might be a good idea. You also might consider a reverse mortgage if:
- You anticipate remaining in your home for a long time
- You cannot afford your current lifestyle and don’t have sufficient savings, but don’t want to move
- You don’t qualify for other loan products due to credit or income restrictions
As you can see, there is a lot to consider when it comes to reverse mortgages.
If you have questions or want to discuss your options, reach out to one of our loan experts today!
Cherry Creek Mortgage, LLC NMLS #3001. Equal housing opportunity. This material is not from HUD or FHA, nor was this approved, endorsed by, or on behalf of any Government Agency. For licensing see www.nmlsconsumeraccess.org.