Reverse Mortgage: What is It? The Pros and Cons

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Are you looking to increase your income stream in retirement? You can use one of your largest assets to increase your income – your home

The Reverse Mortgage

A reverse-mortgage allows you to borrow against your home’s equity all while still maintaining ownership of the home.

Unlike conventional mortgages with a reverse mortgage there are no payments involved.

Instead, the lender makes payments to the borrower! This is either through a lump sum, monthly payments, or a line of credit.

The borrower repays the reverse-mortgage when the borrower dies, permanently moves from the residence, or the property is sold.

So instead of you paying the bank monthly and the equity in your home growing, the reverse happens – the bank pays you monthly, and the equity may shrink.

Also, it is important to know that you must be at least age 62 to qualify for a reverse mortgage.

How Does a Reverse Mortgage Benefit Me?

A reverse mortgage can be a powerful source of funding for increasing income to be comfortable in retirement.

The largest personal asset most retirees possess is their home. In many cases the home is paid off.

When you take out a reverse-mortgage this will increase income without increasing monthly payments – and you stay in the home.

The amount you will be eligible for is based on several things, including

  • Your home’s value
  • Your age
  • Interest rates

You will be eligible for more money the older you are, the more your home is worth, and the lower current interest rates are.

Reverse Mortgages – The Negatives

The costs involved in a reverse mortgage are a negative aspect you need to consider

Reverse-mortgage fees can include

  • The interest rate
  • Loan origination fee
  • Mortgage insurance fee
  • Appraisal fee
  • Title insurance fees
  • Various other closing costs

All mortgages have costs, but the above are extremely high when compared with a traditional mortgage.

Costs vary but can be as high as $30,000 or $40,000. This cost is not paid out of pocket, but rolled into the loan.

Another potential negative is the requirement to pay back the loan if you should permanently move out of the home.

While this may not sound like an issue initially, if you ever need to enter a full-time care facility, the loan would become due if you left your home for a year or more.

The final downside to the reverse-mortgage affects your estate. You will leave less money to your heirs because the reverse mortgage will almost always decreases your home equity.

The Myths – And Truth – About Reverse Mortgages

You need to be careful not to let reverse mortgage misconceptions cloud your consideration of these complex loans. Failure to do so might lead you to proceed too hastily without realizing all the possible repercussions.

Here are a few myths and truths about reverse mortgages

  • Myth: The lender possesses the title to the home.

Truth: The reverse mortgage is only a lien against the property – you still own it.

  • Myth: The loan can exceed the value of the property

Truth: A reverse mortgage is a “non-recourse” loan. This which means that you and your heirs, or estate will never owe more than the appraised value at loan maturity.

  • Myth: You can’t get a reverse mortgage if you currently have a conventional mortgage.

Truth: This is true. However you can get a reverse if you use the proceeds to pay off your existing mortgage at close.

  • Myth: Getting a reverse mortgage can lead to eviction from your home.

Truth: You leave your home when you choose. No one will force you from your home. You don’t need to pay off the reverse mortgage unless your home is no longer your primary residence.

Reverse Mortgage Summary

Here is a summary of some of the more salient pros and cons of the reverse mortgage

Pros

  • Flexible disbursement options – like a monthly or line of credit
  • You stay in the home without making monthly mortgage payments
  • The reverse-mortgage gets rid of any existing mortgage
  • Your heirs are not personally liable if payoff balance exceeds the home value
  • Your heirs inherit remaining home equity when the reverse mortgage is paid off
  • Reverse mortgage proceeds are tax-free
  • Reverse mortgage interest rates may be lower than other options

Cons

  • Your heirs estate inheritance may decrease over time as proceeds are spent
  • Reverse mortgage fees are typically higher than with a traditional mortgage, including
    • Federal Housing Administration (FHA) mortgage insurance premium
    • Ongoing FHA mortgage insurance premiums
    • Loan origination fee
  • While a reverse-mortgage loan generally does not affect eligibility for Social Security and Medicare, needs-based government programs like Medicaid may be affected
  • Reverse mortgages are confusing and not well understood

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