What Are the Pros and Cons of Reverse Mortgages?
On the surface, reverse mortgages seem to be very convenient financial tools that allow you to tap into the equity locked up in your home and use it for whatever you might require. They can do that, certainly. However, like all financial products, they can cut both ways. There are pros and cons to reverse mortgages, and as an informed consumer, it is vital that you have a good understanding of both.
Pros of Reverse Mortgages
We’ll begin with the pros in favor of reverse mortgages to help understand how these financial products can benefit you.
Access to Cash: Perhaps the single most important benefit here is that you have access to the cash that you need to improve your quality of life and enjoy some peace of mind. Retirement can be an amazing time, but if you’re strapped for cash, it can be incredibly frustrating. Countless seniors find themselves back on the job market hunting for part or even full-time work simply because they lacked enough in savings to meet their financial obligations. By taking out a reverse mortgage, you can help prevent that in your case.
No Additional Bills: Another benefit of a reverse mortgage is that it allows you to gain access to additional cash without a corresponding increase in your bills. For instance, with a home equity loan, you’ll usually need to repay the loan within five to 10 years. With a reverse mortgage, you never have to make a single payment as long as you live in the home as your primary residence. That’s serious peace of mind.
You Stay in Your Home: With a reverse mortgage, you are able to get at the money tied up in your home without having to sell it. That means no need to wait for months for a seller to show up, and no need to search for weeks for a new home. You also don’t need to worry about the moving process. You can stay where you’re most comfortable, in a home that you continue to own throughout the duration of your life.
Consistent Stream of Income: If you choose to go with an adjustable rate mortgage, rather than a fixed rate mortgage, you can enjoy a steady, ongoing stream of income. That offers predictability and stability. You know exactly what you have coming in each month and can plan with certainty. Couple that with the ability to combine a line of credit with monthly payments, and you can enjoy even more flexibility.
Big Purchases: If you opt for a fixed rate mortgage, rather than an adjustable rate mortgage, you can benefit from a single, large, lump sum payment at the time of closing. That’s great for anyone who needs to make a big purchase or pay off a significant amount of debt in a very short time.
No Liability for Your Heirs: If you decide to leave your home to your heirs after you pass on, they can sell the home and not suffer any liability if the sales price is lower than the payoff balance. However, if the sale value is in excess of the payoff balance, the extra money goes to the estate for distribution to your heirs.
These are just a few of the most obvious benefits to a reverse mortgage. Your personal situation may provide others not listed.
Cons of Reverse Mortgages
Just as there are benefits to taking out a reverse mortgage, there are also drawbacks that may prove to be serious hurdles. Below, we’ll discuss some of the most important.
Existing Mortgage Balance: In order to apply for a reverse mortgage, your current mortgage must be paid off or very low. One of the intended uses of this mortgage program is to allow senior homeowners to pay off their home loans with the reverse mortgage money, freeing them from a significant monthly expense. However, you may find that your reverse mortgage only provides enough money to pay off your existing mortgage, leaving you with no additional funding.
No Home Equity Loans: Another drawback to reverse mortgages is that they make you ineligible for any type of home equity loan in the future. Home equity loans are used for everything from making repairs and renovations to the home to paying for medical costs. However, because your reverse mortgage is based on the equity you have in the home, there is no further equity to make a loan against. Once you tap into the equity with a reverse mortgage, it is used up, unless you choose to make monthly payments and pay down the loan balance.
You Don’t Get the Full Value: To be clear, when you take out a reverse mortgage, you do not get the market value of the home. You get a percentage of that value. For instance, a home worth $250,000 may only net the owner around $80,000. This may or may not be enough to make a difference in your retirement, and you could be better off paying down the mortgage and then selling the home on the open market rather than sacrificing the full value of the home in the name of a small percentage now.
Higher Fees: You’ll find that you pay more in fees and costs with a reverse mortgage than with conventional mortgages. This includes the mortgage insurance premium and annual mortgage insurance premiums the FHA requires from borrowers, as well as origination fees, appraisal fees and a great deal more. In some cases, your costs can be as high as $30,000, and rather than being paid out of pocket, is rolled into the loan, where it adds to the interest-generating balance.
You Must Pay the Loan If You Move: This is one drawback that ultimately trips up a lot of seniors. Right now, it might not seem like a big deal. You probably don’t ever intend to move. You’re planning to live out the rest of your life in that home. However, what happens if you must be moved into an assisted living facility or long-term care facility and are gone for 12 months or more? That counts as moving out, even though it might not be entirely voluntary. When that happens, you’re on the hook for the loan principal plus the interest. However, if you have an HECM, and you move to a nursing home or assisted living facility, your non-borrowing spouse may be able to stay in the home, as long as they meet the eligibility requirements. If you both are borrowers on the reverse mortgage, and one of you moves into a nursing home, the other spouse may stay in your home indefinitely (provided they continue to pay property taxes, homeowner’s insurance, HOA fees and other required costs).
No matter your age or your financial situation, these potential drawbacks bear studying. They could have a significant impact on your experience.