Reverse mortgages used to have a questionable past, mostly due to misinformation about how the program works. In reality, they’re the perfect solution for some homeowners. After retirement, and without a regular stream of income, some seniors can’t keep up with the rising medical costs and other expenses. While many of these seniors don’t have a steady stream of income, they do have one asset with a lot of equity: their home. This is where reverse mortgages come into play. Reverse mortgages allow seniors to tap into a portion of their home equity and take that equity out as cash. This cash can be spent as they see fit, but most seniors use the cash to maintain their home or catch up on medical bills.
Reverse Mortgage Pros and Cons
Over the last decade or so, reverse mortgages have surged in popularity. Whether you’ve heard about them on TV, read about them in the newspaper, or have a friend who took out a reverse mortgage on their home, you’re probably wondering if a reverse mortgage would benefit you. Although reverse mortgages leverage your home equity to give you more upfront cash to pay off medical bills and make home improvements, they are not a retirement tool for every senior citizen. Since weighing the pros and cons of any major decision is wise, we’ve highlighted the potential pros and cons of a reverse mortgage so you can make the decision that’s right for you.
The Benefits of a Reverse Mortgage
For the right individuals, a reverse mortgage can be a powerful source of additional income. In most cases, the largest personal asset most retirees have is their home, so why not put it to work for you? If you’re at least 62 years old you can use a reverse mortgage to convert some of your home equity into cash. If you’ve been considering a reverse mortgage, it’s important to remember that the amount you’ll be eligible for depends on several factors. With that in mind, here are some of the benefits of reverse mortgages:
- Provides flexible disbursement options (i.e., a lump sum, line of credit, regular payments).
- Proceeds are generally tax-free.
- Generally, they don’t impact Social Security or Medicare payments.
- Homeowner can stay in the home without making monthly mortgage payments.
- The funds from a reverse mortgage loan can be used to pay off an existing mortgage.
- Closing costs and ongoing fees can be financed with the loan, so out-of-pocket expenses are minimal.
- Your heirs aren’t personally liable if payoff balance exceeds your home’s value.
- After the loan is repaid, any remaining equity belongs to you or your heirs.
As mentioned above, you aren’t required to pay back the loan until the home is sold or otherwise vacated. At that time, the loan must be paid back in full. The only other obligations you’ll have as a homeowner include keeping your home maintained, performing any necessary repairs, and staying current on property taxes and insurance premiums. Otherwise, you’ll risk default.
In many cases, misconceptions about reverse mortgages cause homeowners to avoid even considering them. If you’re an eligible senior who needs some clarification, reach out to our HomeBridge Mortgage Loan Originator for more information.
The Cons of Reverse Mortgages
Getting a mortgage can be stressful, even if there are plenty of benefits to doing so. As with any mortgage, it is important to weigh the pros and potential cons, so that you feel completely comfortable with your choice. Understanding the features of the reverse mortgage will help take the stress out of the decision-making process. Here are some cons to consider:
- There will be closing costs, which can be paid out-of-pocket or rolled into the loan amount.
- You may outlive your equity.
- If you have to move out for any reason, your loan is due in full.
- Value of estate inheritance may decrease over time as proceeds are spent.
- As home equity is used, fewer assets are available to leave to your heirs.
- Eligibility for needs-based government programs (i.e., Medicaid and SSI) may be affected.
If you’re still asking yourself “Is a reverse mortgage a good idea?”, keep the following reverse mortgage information in mind:
Are You Financially Responsible?
The first thing you need to evaluate is how financially responsible you are, and it’s important to be honest with yourself. Why? You can receive your funds in one of three ways (lump sum, periodic payments, line of credit) and your degree of responsibility can help you determine which form of “payment” is right for you.
Do You Need to Tap into Your Home Equity?
Essentially, if you need the money to cover day-to-day living expenses, a reverse mortgage probably is an excellent option. The proceeds you pull from a reverse mortgage are tax-free and a reverse mortgage is the only mortgage program that allows you to tap into your equity with a payment optional loan.
How Long Do You Plan on Living in the Home?
Reverse mortgages have up front closing costs, which are rolled into the loan. The longer you live in your home the cheaper the loan becomes because you amortize the costs over a longer period of time.
Does Your Spouse Want to Keep Living in the Home After You Pass Away?
Yes, it’s a difficult conversation to have. Unfortunately, it’s a necessary one. If your spouse or partner wants to keep living in the home after you pass away, they’ll need to be listed as a co-borrower on the reverse mortgage (if they are 62 years of age). If they are not 62, they can be listed as a non-borrowing spouse with all the protections the borrower has, except they cannot access the reverse mortgage proceeds after you pass away.
Do You Qualify?
So, you’ve read through the above reverse mortgage information and decided it’s right for you ― but do you qualify? Before you get the loan process started, take some time to make sure you and your spouse or partner meet the individual requirements for a reverse mortgage. Since reverse mortgages are designed to help seniors stay in their home, there are certain age requirements and other qualifications you and your spouse or partner must meet, including:
- You must be at least 62 years of age*.
- The house must be your primary residence.
- The proceeds from the reverse mortgage must pay off any current liens.
- There are financial assessment conditions which must be met.
*If your spouse wants to be an official borrower on the loan, he or she must be at least 62 years of age, too. In the past, some married couples made only one spouse an official borrower on the contract, with an unintended consequence: if the borrowing spouse died first, the reverse mortgage was due and, in many cases, the surviving spouse would lose the home unless he or she could repay the reverse mortgage in full. Fortunately, HUD now has a procedure that can often prevent that problem.
Are you ready to find out if you qualify and want to get the process started? Contact a HomeBridge Mortgage Loan Originator today.