Reverse Mortgage for Seniors Good or Bad – What Are the Pros & Cons?
Reverse Mortgage for Seniors Good or Bad – There has been a lot of talk about reverse mortgages as a way for seniors to leverage their home ownership into some extra income. Just as with any other business deal, especially one involving something as important as home ownership, it is important to examine the pros and cons in detail. These transactions can provide the relief of extra income for some seniors, but they will not work out well for everybody.
What Are Reverse Mortgages?
These programs allow seniors, usually over age 62, to withdraw some of their home equity in cash. This comes in the form of a loan against home equity. The recipient may get a line of credit, lump sum cash payment or payments made over time. It can provide a tax free source of income or cash to supplement social security or other retirement accounts.
It is, of course, a loan that must be paid back. But the borrowers can stay in their home as long as they can pay for taxes, insurance, etc. The bill comes due when the borrowers leave their home. Usually,when the borrowers leave, the home is sold. The proceeds from the sale must pay back the loan. Any money that is left over either goes to the seniors who took out the reverse mortgage or their beneficiaries.
To qualify for a reverse mortgage, the borrowers must usually be 62 years old, or older. The home must be paid off or have a very low mortgage balance that could be paid off when the loan is settled. Different lenders may also have other qualifications that must be met.
Reverse Mortgage vs. Home Equity Loan
In order to qualify for a home equity loan or line or credit, the borrower has to demonstrate the income and sound credit to pay it back. In the case of a reverse mortgage, the loan is paid back when the home is sold so there is no requirement to qualify by credit scores, income, etc.
The amount you can borrow with a reverse mortgage does not depend on income or credit ratings, but on the home value, age of the borrowers, and the current interest rate.
In addition, a borrower has to start making monthly payments with a home equity loan. In the case of senior reverse mortgages, the loan only has to be paid back when the seniors move out. However, the borrowers do need to keep up other home owner obligations like paying homeowners insurance, association dues, and property taxes, and keeping the home as a primary residence. The precise obligations will depend upon the lender.
Are Reverse Mortgages a Good Idea For Seniors?
Well, this product has certainly gotten a lot more popular. According to HUD (US Department of Housing and Urban Development), the number of federally insured transactions has more than doubled in recent years. But let’s look at the downside.
The Pros of Reverse Mortgages
- The homeowner never makes monthly payments.
- The homeowner keeps the title to the home.
- The homeowner receives monthly income while he or she lives in it as a primary residence and can choose how
- they receive the money – lump sum, fixed monthly income, or line of credit.
- The homeowner never owes more than the house is worth even if you outlive your loan and receive more in payments than the house is worth.
- The homeowner’s heirs never owe more than the house is worth.
- It’s easy to qualify for reverse mortgages. Income and credit scores aren’t part of the process.Reverse mortgage income doesn’t affect Medicare or social security benefits.
- After the home is sold and the loan and fees are paid to the lender, remaining equity belongs to the homeowner or the homeowner’s heirs.
The Cons of Reverse Mortgages
- High closing costs. Many times the originations fees are double the rate for conventional mortgages.
- Reverse mortgages generally have adjustable interest rates.
- Homeowner is responsible for real estate taxes, homeowner’s insurance and repairs.
- Homeowner must be 62-years-old or older to qualify.
- Interest is charged to the outstanding balance of the loan increasing homeowner’s debt.
- Interest isn’t tax deductible until the loan is paid off.
- Not examining the total fees for a reverse mortgage
- Not having an estimate of how long you will be living in the house
- Trying to finance frivolous purposes with the reverse mortgage
- Not thinking about the heirs
Reverse Mortgage Alternatives
There are other options for many seniors. If seniors have a convertible or whole life policy, they may want to consider a senior life settlement. If the potential borrowers need the money to improve or repair their home, there may be government grants or local foundations that can provide help at little or no cost.
If the main financial issue is the cost of paying for the home, it may be time to sell it and move into cheaper accommodations too. The important thing is to analyze the situation, get professional counseling, and make sure you pick the solution that is best for you and your family!
Reverse Mortgage Scams
Be wary of some companies that want to charge a fee in order to find you a reverse mortgage. Also, some private lenders charge very high fees which will reduce any home equity you have left and the amount of cash you can get. Please refer to the HUD Reverse Mortgage website for more information.