Knowing about the Advantages and Disadvantages of a Reverse Mortgage
If you are age 62 or over, the chances are that your mortgage has been paid off, or you have significant equity in your home. That is quite an accomplishment and something that homeowners dream of accomplishing. However, once your mortgage is paid off, even the savings of NOT having to make that monthly payment might not be enough for projects that need to be done to maintain your home.
Or, you may be at a point where your income has lessened due to retirement, but you have dreams of things you want to accomplish in the last decades of your life. The rretirement is the perfect time for travel to places you have never been or to cross activities off that seemingly endless bucket list. With a reverse mortgage, those dreams can become a reality.
A reverse mortgage gives the best chance to take a loan out against total value of a home. With this type of loan (officially referred to as a Home Equity Conversion Mortgage or HECM), you will not be needed to make monthly payments. Instead, the balance of the loan becomes outstanding and payable when you die, move away permanently, or sell your home. Federal regulations require that lenders structure the loan amount so that it does not surpass the worth of your home. This make sure that you or your estate are not held accountable for paying the difference if the loan balance is more than your home’s worth.
If you are considering such a mortgage, you will be delighted to know that there are a host of benefits to doing so. It is essential to weigh the advantages and disadvantages of any financial offering before you sign on the dotted line.
- Ability to live a more comfortable retirement
- Make sure to live in the home and hold the title
- Ability to take funds as a lump sum or a line of credit that you can access as needed opportunity to pay off the existing mortgage on your home and free yourself of monthly payments
- No need for a monthly mortgage payment as long as you reside in the home, and you continue to meet your obligations for homeowner’s insurance, property tax payments, etc.
- Closing costs and fees tied to your such loan can be financed, which makes your out-of-pocket expenses quite minimal
- Proceeds from the loan are not usually considered taxable income
- Your loan will not negatively impact your Social Security or Medicare benefits unlike other personal loans and other types of debts taken in emergencies.
- Neither you nor your heirs become personally responsible for any amount of the mortgage that exceeds the total worth of home once it is repaid
- If your home worth increases after you take out the loan, you can consider a reverse mortgage refinance mortgage to access further funds should you need them
- Once your reverse mortgage loan is repaid, the remaining equity belongs to you or your heirs
With any financial obligation, there are disadvantages as well. Be sure that before you take advantage of a reverse mortgage option, that you have thoroughly educated yourself on the disadvantages.
- If you and your co-borrower both pass away, the loan will need to be repaid before the home’s title can be transferred to your beneficiaries
- Your SSI and Medicaid payments will likely be impacted
- Interest will be compounded on your mortgage and you will not be able to deduct them from income taxes until after the loan is repaid
- As equity begins to decrease in your home (this is expected with each payment you receive), it is possible that you may not have enough left for your future needs or for your estate
- Mortgage equity income will come to an end when your home equity term has been reached, if you sell your home, if your home has not been main principal home for the last 12 consecutive months, or if he last borrower on the mortgage passes away
- You will be expected to pay off the remaining home mortgage with your own funds or with profits from the closing of your loan
- Before you can obtain most reverse mortgages, you will need to attend and participate in an approved consumer education course about it
- The home must be sold for you to pay back the reverse mortgage and there is no way to guarantee that money will remain for your beneficiaries
- The interest rate, as well as upfront costs, are generally higher for these than for the traditional mortgage or other equity loans
- It has variable rates that fluctuate with market conditions
- You will be expected to pay the interest on your insurance premiums, closing costs, broker’s fees, and any other service fees that are built into the loan
- You are still accountable for paying your taxes on property and homeowner’s insurance, and ensuring that your home is properly maintained and in good repair
- If you fail to pay both above taxes and if you do not properly maintain your home, you will need to repay the loan immediately
How to qualify?
If the advantages and disadvantages mentioned above seem reasonable to you, then the next step is to confirm that you are eligible. To qualify for a HECM, you must be at 62 years old at least, and your home must be your principal residence. You should be able to prove that home is owned outright (meaning your mortgage has been paid in full) or that your mortgage balance is low enough that is can be fully paid off with the proceedings of closing of a mortgage loan.
Keep in mind that such mortgages have limits, and you may not qualify if you still owe too much money on your traditional mortgage. Further, you must have the means to pay the ongoing associated property taxes and insurance. And, you need to be able to cover maintenance and repair costs. Finally, you will need to meet with the United States HUD-approved counselor to discuss and determine your eligibility, as well as the financial implications of the loan.
To date, only a small number of the eligible American population have a reverse mortgage. This would indicate that these unique loans are truly a niche product. Furthermore, now that more and more retirees have retirement accounts that can help fund them in the years to come, fewer people are turning to such mortgage strategy. With the average lifespan increasing, however, and the rising costs of healthcare, it can play an important part in ensuring you have the financial independence that you need after retirement, regardless of whether or not you are receiving payouts from a retirement account.