A reverse mortgage is a financial agreement where a homeowner will relinquish the equity they have in their home. In exchange for doing so, a lender provides the homeowner with regular payments that can be used to supplement an income. This lending product is often used by retirees.
Unlike a traditional mortgage, which has its balance decline over time, a reverse mortgage has a balance which climbs over time as interest accrues.
The pros and cons of a reverse mortgage show that some homeowners can benefit from this lending product. It also shows that it may not be the best financial option for certain homeowners as well.
These are the key points to consider.
List of the Pros of a Reverse Mortgage
1. You still own the home with a reverse mortgage.
The equity in your home is leveraged as a financial instrument which provides a stream of income. Even though you are receiving these monthly payments, you still own the home. The reverse mortgage is then repaid after you die, or you move away from the home and sell it. Your equity shrinks in the home because you’re using the money to meet other needs.
2. You continue to live in the home.
You retain the title to your home with a reverse mortgage. You still live in your home, as you do now. You’re just adding a mortgage stipulation to it that you must fulfill, just like any other mortgage you would have. Most reverse mortgages require you to keep your property taxes current. You’ll be required to pay HOA fees if they apply. Maintenance and insurance costs are typically part of the package as well.
3. You have different ways to receive the money.
The most common way to use a reverse mortgage is to take monthly payments to generate an income stream. You can also take the money from this lending product in a single lump sum. The latter option comes with a fixed-rate loan that can be used as a way to downsize to a new home without the hassle of selling your property first. Once you find the new home and move out, the stipulation of selling the previous home and paying off the reverse mortgage comes into play.
4. You have no monthly mortgage payments to make.
Reverse mortgages pay you to stay in your home. You don’t need to worry about making a monthly payment with this lending product as long as you continue to live in the home. Unlike traditional mortgages, a reverse mortgage will not pull out your property taxes and other fee responsibilities, so you’ll need to pay those on your own, before their deadline, to keep the loan in good standing.
5. You may not need to pay taxes on the income.
Some homeowners may find that the income they receive from a reverse mortgage does not count toward their overall taxable income for the year. Most loan proceeds can be used with a minimal amount of out-of-pocket expenses. There are some exceptions to this advantage, however, so you’ll need to consult with a tax professional before finalizing any agreement to know what your responsibilities will be.
6. You may not affect your entitlements or benefits.
Most reverse mortgage proceeds will not affect the Social Security check you receive each month. They do not usually affect your Medicare benefits either. Every financial situation is a little different and some exceptions apply here as well. You’ll want to review your financial situations with a qualified buyer before deciding if a reverse mortgage is the right way to generate an income stream for your retirement.
7. You are agreeing to a non-recourse loan.
A reverse mortgage is a non-recourse loan. If the value of the mortgage exceeds the value of the home at any time, then you are not responsible for the difference. Your heirs will not be responsible for any differences in this area either when the loan is eventually repaid. This also means that if your home increases in value and you control all or most of its equity, you can refinance the reverse mortgage to receive higher proceeds from the loan. You will never owe more than what the home is actually worth.
8. You still control the equity that remains.
Once the reverse mortgage is fully repaid, you control whatever equity continues to remain in the home. Even if you’ve taken a reverse mortgage for some time, your heirs will still benefit from the remainder that is available after the home is sold or the mortgage amount is repaid. You do not automatically just hand over your property to the lender, nor does your estate, when you agree to a reverse mortgage.
9. You have access to offers from multiple agencies.
Some local governments offer single-purpose reverse mortgages to help low-income borrowers. These allow for home repairs, to pay property taxes, or make general improvements. Some non-profit agencies offer this type of loan as well. Some reverse mortgages are insured by the federal government, though the fees can sometimes be high with this product. There are also proprietary loans of this type made by private lenders that may offer better rates.
10. You do not have the loan come due if a spouse passes away.
Before 2013, some reverse mortgage lenders were demanding that a surviving spouse immediately repay a loan. This created many difficulties for families, as it required the surviving spouse to sell the home to repay the debt, leaving them no place to go in some instances. That policy was struck down by the court system, which eliminates the threat of a widower or widow from being forced involuntarily into the foreclosure process.
11. You have flexibility in accessing your funds from the reverse mortgage.
Some households treat their reverse mortgage like a credit card, using the proceeds to pay for items each month, then repaying it as they can. Others take out less money when needed, then access more resources for an unexpected expense. Every lender has a different policy regarding the flexibility of payments, so it is important to evaluate every option available before deciding on a disbursement strategy.
List of the Cons of a Reverse Mortgage
1. It can be a costly lending product.
Any mortgage or loan has fees and various other costs involved. Although costs can vary with a reverse mortgage, expect to pay about $30,000 at minimum from your home’s equity to generate an income stream. Some reverse mortgages may charge even more. You don’t pay these fees out-of-pocket. They are rolled into the loan. That can make it challenging for family members who you might want to have inherit the property one day. You may find that up to $10,000 of your home’s equity is immediately used for the loan.
2. It is a loan that must be paid back.
Many reverse mortgages have a stipulation that the loan must be paid back if you permanently move out of your home. That timeline on that stipulation is usually 12 months. That may not seem like a big deal when you’re trying to figure out a retirement income, but it could be later on. If you are forced to move into an assisted living facility or a nursing home, the lender would demand that the loan be repaid.
3. It will affect your estate.
Most reverse mortgages decrease the equity in your home immediately. That means your heirs will receive less money from the sale of your home. It could mean that they receive nothing from the property if you’ve drained all your equity to provide a retirement income. There are some advantages that can be found in this lending product when managed correctly. If pure income is your sole motivation, however, it will reduce the amount of an inheritance that you’re able to leave.
4. There are age restrictions to loan qualification.
You must be age 62 or older to qualify for a reverse mortgage product. If you are younger than this and already retired, you cannot access your home’s equity with this lending product for an income stream. You would need to take out a home equity loan instead, which has its own set of pros and cons that must be considered.
5. Every reverse mortgage comes due at a maturity event.
When the last surviving borrower passes away, then the reverse mortgage loan becomes due. If the home is vacated for 6 months without a medical reason, this qualifies as a maturity event as well. Lenders can also call the loan due when insurance, HOA fees, property taxes, or home maintenance responsibilities are not performed. That can make it difficult for some households to retain possession of the property, forcing them into a sale.
6. It may affect some benefits.
If you are currently enrolled in a needs-based government program, the income from a reverse mortgage may disqualify you from certain benefits that you currently receive. That includes Supplemental Security Income (SSI) and Medicaid. If you receive benefits from either program, you’ll want to consult with a benefits expert about your specific situation to know what to expect if you decide a reverse mortgage is right for you.
7. You can outlive your equity in the property.
A reverse mortgage tends to be a last-resort option for retirees who are struggling to meet their monthly income obligations. When managed correctly, it can be the supplement necessary to meet current and future obligations. It is not, however, a one-size-fits-all solution. If your home’s value is somewhat low, then your equity will be low, and your income from this lending product may not fully meet your ongoing needs.
8. Several reverse mortgages utilize adjustable rate terms.
With adjustable rates on the reverse mortgage, there are fewer guarantees on future income levels over the life of the loan. Many recipients discover that these adjustable rates can affect the cost of the loan over time, even if their income levels remain stable. This is another issue which generally affects the heirs of an estate and may negate any value they are able to receive from the sale of a home.
9. It still comes with the risk of a foreclosure.
Homeowners who do not fulfill their obligations with a reverse mortgage and continue accepting payments still face the risk of foreclosure. This can happen if insurance payments become past due or taxes are missed as well. For that reason, it is important to evaluate future finances, in addition to current finances, to determine if this lending product makes sense for you. If a reverse product only postpones an inevitable situation, it may be better to sell the home at full equity than eat it up with a reverse mortgage product.
The pros and cons of a reverse mortgage indicate that retired households can generate a needed income stream when there is enough equity in the property. Not everyone who applies for a reverse mortgage will qualify for one. Because the loan is usually paid off when the house is sold, it may not be the right choice for some families. Evaluate all financial options, then decide if a reverse mortgage is right for you.