Getting a reverse mortgage is as much a lifestyle decision as it is a financial decision. As in almost all major decisions that one must make in life, opting for a reverse mortgage has pros and cons to consider. While not exhaustive, some of the elements to consider for and against the decision to go forward, or not, are listed below:
Pros – Reasons to consider a Reverse Mortgage
- You have equity in your home and would like (or need) to convert that illiquid asset (home equity) into a liquid asset (cash), without having to sell the home or place another regular mortgage, home improvement, or home equity loan on the home.
- Qualifying for a reverse mortgage does not involve or require credit history, employment or income.
- You may payoff of your tax liens or existing mortgage using reverse mortgage proceeds, if the mortgage or lien amount is low enough to be covered by reverse mortgage proceeds.
- You never ever have to make a payment on a reverse mortgage as long as you live in your home.
- You never have to pay off a reverse mortgage as long as you live in the home, maintain the home, and keep the taxes and insurance current.
- You may use the proceeds of the reverse mortgage for any purpose.
- You may take your money in a lump sum, a monthly payment, a line of credit, or any combination thereof.
- Your line of credit can grow. If you choose a HECM reverse mortgage with a line of credit payment option, the size of the line of credit will increase annually.
- Your heirs only have to pay back the loan to the extent the sale of your home covers the debt. If the debt exceeds the sales price of the home, FHA pays the difference, not your heirs. They never have to come out-of-pocket to pay off your reverse mortgage.
- Funds you receive from a reverse mortgage are tax free and do not affect your social security or Medicare benefits.
- You still have equity in your home following the funding of a reverse mortgage.
- The bank does not own your home; you do, and will for as long as you live.
Cons – Things to think about when considering a Reverse Mortgage.
- You must have significant equity in your home, or have it paid for in full, in order to secure a reverse mortgage. If you have a high loan to value on your home, a reverse mortgage may not be right for you.
- The amount of money you are entitled to, under reverse mortgage guidelines, is dependent on the age of the youngest borrower in the home and the value of the home; and, the percent of value you receive varies with your age at the time of the closing of the loan.
- Failure to maintain the home to minimum FHA standards, to keep taxes paid and keep homeowner’s insurance in force on the home, are elements of default on a reverse mortgage. If you cannot, or will not meet those minimum requirements, a reverse mortgage may not be right for you.
- A reverse mortgage, like any mortgage, has closing costs (including FHA Mortgage Insurance Premiums) which are paid at the closing of the loan out of loan proceeds. This amount, while usually comparable to costs incurred in any mortgage transaction, can amount to several thousand dollars and that amount is deducted from the funds you will be eligible to receive from the reverse mortgage loan.
- Reverse mortgage proceeds do not affect social security or Medicare eligibility, but may affect other programs such as SSI, or State run programs such as Medicaid. Before opting for a reverse mortgage, check with program advisors or administrators to see what effect, if any, a reverse mortgage may have on your eligibility for those programs.
- A reverse mortgage must be paid off if you move from the home on which a reverse mortgage is placed. If you leave the home for more than one year, or switch to another home as your primary residence, this event is triggered.
- Normally heirs sell your house to pay off your reverse mortgage after you pass away. If your heirs elect to keep your home after you pass away the reverse mortgage loan must be paid from insurance proceeds, refinance proceeds, the personal assets of the heirs, or from other resources. The bottom line is the reverse mortgage must then be paid in full.
- Equity in your home may be “used up” over time (depending on the type reverse mortgage you have, the appreciation in value of your home, and the amount of money you have drawn), leaving little or no equity for your heirs. This may, or may not be a problem for your heirs. Simply ask them if they are expecting to get money from the equity you have in your home when you die. Most will want you to enjoy the money you have invested in your home over time and will say “no,” but the question probably should be asked anyway.
As with anything in life, it is good to weigh the pros and cons of getting a reverse mortgage – and be sure to speak with a loan officer who specializes in Reverse Mortgages. They will be able to help you see what is right for you in your particular situation.Click to See the Latest Mortgage Rates»