A reverse mortgage has the potential to be a great source of income providing guaranteed funds for the future, and it may even become an integral part of your retirement plan. Reverse mortgages, however, do not always work for everyone, so it is important to understand the reverse mortgage pros and cons. This webpage is a great place to start to gain a better understanding of whether a reverse mortgage is the right option for you.
Pros of a Reverse Mortgage
- Reverse mortgages can supplement the income source of homeowners age 62 and older.
- You can live in your home and continue to hold the title to the home.
- Loan proceeds can be used for whatever you want. Many people simply supplement their income, but some use the proceeds to complete home renovations, pay for tuition, and many other uses–after all, the money is yours to use as you wish.
- Reverse mortgages are flexible. You can take the funding as a single payment (‘lump sum’), as a line of credit that you can use as you need, or as a monthly payment for however long you like. You also have the option to use a combination of these choices.
- The funds that you receive from your reverse mortgage can actually be used to pay off an existing mortgage. While a reverse mortgage will place a lien on the home, you are never required to make a single principal or interest payment. This means that you will never have to make another payment on your existing mortgage.
- There are no payments to be made for a reverse mortgage. As long as you pay your property taxes, keep homeowner’s insurance, and maintain the property, you will never have to make a payment.
- Closing costs and fees can be paid from the proceeds of your reverse mortgage, so there are virtually no expenses associated with the loan closing.
- The money from a reverse mortgage loan is generally not considered to be taxable income. Since reverse mortgages are considered to be loan advances, they are not taxable. This means you will not have to pay taxes on this money.
- A reverse mortgage does not have any effect on Social Security or Medicare benefits, so you can continue to receive the same benefits you receive today.
- Reverse mortgage loans are non-recourse loans, so neither you nor your relatives will have to pay any amount of the mortgage that exceeds the value of your home. This means that if your reverse mortgage balance is $120,000 and your home is valued at $100,000, you or your relatives are not liable for the excess $20,000.
- Reverse mortgage loans can be refinanced to access more proceeds. As you age, you are able to access more of the home’s value. Additionally, as your home increases in value, you are able to access even more money.
- After the loan has been paid back, you or your heirs will own the remaining equity in your home.
Cons of a Reverse Mortgage
Although there are many pros to a reverse mortgage, there are some cons to a reverse mortgage as well. Now for the cons section of reverse mortgage pros and cons:
- The balance on the loan increases over time as interest on the loan accumulates.
- As home equity is used, there are fewer assets remaining for your family. You can still leave the home for your family, but they will need to pay off the remaining balance on the reverse mortgage. Often the loan balance is repaid by selling the home, but the balance can also be repaid by a traditional mortgage loan.
- The fees associated with a reverse mortgage can be higher than a traditional mortgage. However, lower-cost reverse mortgage options do exist.
- The loan is due and needs to be repaid when it matures (the last surviving borrower passes away, the borrower no longer lives in the home, or if the borrower leaves the property for more than 1 year). The loan can also become due if the homeowner does not pay property taxes, homeowner’s insurance, or allows the property to fall into disrepair.
Conclusion: Reverse Mortgage Pros and Cons
The reverse mortgage pros and cons are many. It is important to work with your lender to determine how to mitigate any issues associated with a reverse mortgage. Knowledgeable lenders are able to help reverse mortgage holders deal with any issues and help a reverse mortgage successfully fit into your retirement plans. Learn more