Pros and Cons of a Reverse Mortgage

What is a Reverse Mortgage?

A reverse mortgage allows the property owner to borrow against the equity in their home to get cash. You can also get a line of credit from the lender.  You have to be 62 years old or older to qualify.  You are not required to make any monthly loan payments and the loan doesn’t have to be repaid until your heirs sell the house!

In addition to being at least 62 years of age, there are a few other requirements needed to qualify for a reverse mortgage.

  • You need to own the home outright or have paid down a considerable amount of the mortgage.
  • The home needs to be your principal residence and you can’t be delinquent on any federal debt. 
  • You will need to be subject to a credit check and other eligibility requirements.
  • You must stay current on your property taxes, insurance and HOA fees.

How Reverse Mortgages Work

In a reverse mortgage the lender makes payments to you.  Instead of you paying down the mortgage to $0 it works in reverse.  The balance owed grows over the time and the balance isn’t due until you move out or die.

When the time comes, the proceeds from the sale of the home are used to pay off the balance if there’s any equity left.  If the loan is worth more than the house your heirs aren’t required to pay the difference.  Heirs can also choose to pay off the reverse mortgage or refinance if they want to keep the property.

Reverse Mortgage Pros

  1. Helps Secure Your Retirement for those who don’t have a lot of savings to cover their expenses in retirement.
  2. You Can Stay in Your Home instead of selling your home to liquify your assets.  You can keep your property while still getting cash out of it.
  3. You’ll Pay Off Your Existing Home Loan with the proceeds from the reverse mortgage.  This give you the money to put towards other expenses.
  4. You Won’t Have any Tax Liability as the funds are taxed because the loan is looked at as an advance rather than income. 
  5. You’re Protected if the Balance Exceeds Your Home’s Value if your home is worth less than the amount owed on the reverse mortgage. 

Reverse Mortgage Cons

  1. You Could Lose Your Home to Foreclosure is you can’t afford your property taxes, homeowners insurance or HOA fees and or other costs associated with owning your home.  You must also live in your home as your principal residence.
  2. Your Heirs Could Inherit Less because the home will need to be sold or refinanced to repay the debt, or turning back over to the bank. 
  3. It’s not Free as there are still many costs associated with being in the home including taxes, insurance and HOA fees.  You must also pay an upfront insurance premium which is typically 2% of the home appraised value and loan origination fees and the time of closing. 
  4. It Could Impact Other Retirement Benefits like your ability to qualify for Medicaid or Supplemental Security Income. 
  5. Reverse Mortgages are Complicated and you should examine all risks involved in the terms of the loan. 

Understanding the Pros and Cons will help you make the best decision for you and your heirs.

Please contact us at 774-806-5034 for more information on reverse mortgages!

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