Pros And Cons of Reverse Mortgage
Pros And Cons of Reverse Mortgage – Reverse Mortgages have been in existence with the government since 1987 and provide seniors with a means to access money in a way that they could have not done so in the past. The Reverse Mortgage, which is also known as a Home Equity Conversion Mortgage (HECM), is insured and backed by the Federal Housing Administration (FHA).
What exactly is a Reverse Mortgage? A Reverse Mortgage reverses the course of payments, unlike a traditional mortgage. Instead of the homeowner making payments to the bank, the bank makes payments to the homeowner. The homeowner can set up a line of credit, take a lump sum or draw fixed monthly payments for a set amount of time or for the rest of their life.
Reverse Mortgage Benefits
- Tax free cash to pay off the mortgage, and more!
- NO credit score, income or asset qualifications.
- The borrower continues to own the home – NOT the bank or lender.
- Government-insured, which means low-risk.
- There are no restrictions on how the borrower spends the money.
- It can pay off the mortgage and other debts.
- Provides cash for travel and leisure activities.
- Use it for Medical Expenses or Long Term care insurance premiums.
- Make home improvements or repairs.
- Education expenses for children or grandchildren.
- Establish a fund for emergency expenses.
- Generally repayment of the loan is capped at loan value.
- There is no effect on Social Security or Medicare eligibility.
- There are no monthly loan payments!
Who can qualify for a Reverse Mortgage? The youngest borrower on the title of the home must be at least 62 years old. So if a couple wants both of their names to be on title, then both borrowers will have to be at least 62 years old.
The home must be your primary residence and have equity in the home. Even if you currently have a mortgage balance on your home, you can still qualify, as long as you meet certain requirements. The types of eligible properties are: Single-family homes, FHA-approved condominiums, townhomes, manufactured homes, and 1-4 unit owner-occupied residences.
Tapping into your home equity with a Reverse Mortgage is easier than ever before. You’ve been paying down or paid off your mortgage balance, and property values are going up again! Tap into that wealth and reward yourself!
Reverse Mortgage Pros
No Monthly Mortgage Payments
You will not have any payments on a reverse mortgage loan for as long as you occupy the property as your primary residence. And the loan does not need to be paid back until you sell your property, move away permanently, or pass away.
Improved Quality of Life
Essentially, the major reason why any senior would want a reverse mortgage is because it would improve their overall quality of life. The money you receive from the equity in your home can be used for anything you desire.
Low Defaulting Risk
Since there are no monthly payments to be made to the lender, the risk of default is super low. A lender may call the loan in, if you do not pay the property taxes, insurance and any HOA fees that are due periodically.
No “Underwater” Mortgage
You can never owe more than the property is worth. Even if the lender paid you out more than the value of your home, the most you will owe is the market value of the property at the time of the sale. So if the real estate market declines and home prices fall, you would still be covered.
Payouts are Tax-Free
Since you are using the equity in your home as income, your payouts are typically tax-free.
Qualification is Easy
There are NO credit, income or asset qualifications when it comes to getting a reverse mortgage, so do not worry if you think that this will be a hurdle.
Flexible Payout Options
A reverse mortgage can be paid out to you in a lump sum, line of credit, fixed monthly payments or can be paid with a combination of any of these three mentioned.
Homeowner keeps Title
The title of the home remains in the homeowner’s name, NOT the lender or bank, contrary to popular belief.
Also Read: Reverse Mortgage Questions and Answers
Reverse Mortgage Cons
Loan Balance Grows
A reverse mortgage charges interest monthly on the balance of the loan, which gets tacked on to the loan amount each month. Which means the loan balance continues to grow over time.
The cost associated with a reverse mortgage is typically higher than a conventional loan because it is backed by the FHA, but the good news is you can roll any closing costs into the loan. So you will have no out of pocket expenses, except for the appraisal.
Tax Deductibility of Interest
The interest on a reverse mortgage cannot be tax deducted, until you pay off the loan or sell the home. Also, if you start making payments back to the lender, then you could possibly start deducting the interest you pay back.
Possible Reduction with Heirs Inheritance
When taking out a reverse mortgage, the balance of your mortgage grows over time, which reduces the equity in the home and possibly lowers the inheritance that your heirs will receive when you pass away. But they will be able to sell the home and the remaining equity in the home will go to them. They can also refinance the property into a traditional mortgage or pay off the reverse mortgage, if they want to keep the home.
The pros and cons of a reverse mortgage has long been a discussion of many senior homeowners as to whether the rewards outweigh any of the risk. One of the biggest advantages of a reverse mortgage is that there are absolutely no monthly payments associated with the loan, this in itself makes for a strong case for the program. Of course there are many other advantages, while there are some disadvantages that are worth nothing.