Pros and Cons of a Reverse Mortgage
Many of my pages on this website recap the Pros of a Reverse Mortgage (obviously). I'll list them by link here, go on to the Cons (which is probably what you really want to know) and then recap the Pros again in words.
- Reasons to Do a Reverse Mortgage
- Using Before Exhausting Savings
- Using to Defer the Start of Social Security
- Easier to Qualify for Than a Regular Loan
- There are More Safeguards Than Most Any Other Type Loan
- It Can be Used to Purchase a Home
- See What My Actual Borrowers Said About Their Reverse Mortgage
In my opinion, many of the Cons are related to most any mortgage. Here is my list. Let me know if you see anything I've missed.
- You must stay current on home owner's insurance, property taxes and general upkeep of the property or the lender could foreclose. (All Mortgages)
- Because there are usually no monthly payments, the balance grows over time. (Reverse Mortgages and All Mortgages with negative amortization.)
- Negative Amortization reduces the equity in the home. This means your heirs may receive less or perhaps nothing at all from the home. (Reverse Mortgages and All Mortgages with negative amortization.)
- If a spouse is left off title and the loan, it could cause serious issues for that spouse when the loan comes due - usually when the borrower dies. (Reverse Mortgages)
- Interest needs to be paid. (Reverse mortgages when the loan comes due and All Mortgages usually on a monthly basis.)
- The HECM Reverse Mortgage may have high upfront fees - some lenders have found a way to reduce these. (Reverse Mortgages)
- Third party fees based on loan amount may be higher - the loan amount on a reverse mortgage is based on the home value rather than the cash disbursed. (Reverse Mortgages)
- The HECM requires a Mortgage Insurance Premium - MIP. (Reverse Mortgages and All Mortgages - FHA and some low down payment choices requiring Private Mortgage Insurance - PMI.)
- If on Medicaid and/or SSI, you need to be careful how to take to funds to continue to qualify. (Reverse Mortgages and All Mortgages.)
- Thirds party counseling required - this is also a safeguard that could also be considered a Pro. (Reverse Mortgages and some Mortgages.)
- Interest is not tax deductible until paid. While earlier payments are allowed, most people don't make a payment until the loan is due and payable - when they sell, move or pass away. (Reverse Mortgages)
- Because lenders earn more money from a fixed rate reverse mortgage, they may 'nudge' you in that direction without telling you about the other choices even if that isn't the best choice for you. What are you going to do with a lot of money that you have to take up front that is costing you over 5% interest. (Reverse Mortgages)
- Limited to borrowers aged 62 or older. Effective in August, 2014, a spouse under age 62 will be allowed. (Reverse Mortgages)
- Limited to the borrowers primary residence. (Reverse Mortgages and many Mortgages to some extent.)
Lets go back to the pros and I'll give you a more detailed list:
- You are not required to make monthly payments (although you are allowed to make payments at any time if you wish to keep the balance from building.)
- The government requires you to participate in 3rd party counseling to help you determine if the reverse mortgage is appropriate for you and what some other solutions may be to satisfy your needs.
- A way to access the equity in your home with tax free money (its a loan - not income) for the rest of your life.
- Can be used instead of Long Term Care insurance with a lot more flexibility should any need arise.
- Helps you avoid selling your home to access that equity and having to pay real estate agents, movers and others costs and discomforts of moving.
- While you could access the equity with a home equity loan, that would require monthly payments while they are not required with the reverse mortgage.
- If you are using the line of credit option with the reverse mortgage, the lender cannot reduce the amount available in the way many home equity mortgage lenders have done due to the fall in home value or other economic reasons.
- The line of credit has a built in growth factor that typically has been higher than bank savings or CD rates.
- If you wish, you may make payment to keep the principal form growing and allowing the Line of Credit to grow faster.
- Flexible - various ways to accept the money - some at the beginning, monthly payments, draw from the account every so often or a combination of all three.
- When the loan comes due - sell, move or pass away - you can't owe more than the value of the home at that time.
- It can be used to pay off an existing mortgage if there is enough equity.
- Poor credit scores, low income and many other barriers of normal mortgages are not considered with Reverse Mortgage qualifying. However, this may be changing sometime in 2014.
- You may stay in the home as long as you wish even if the loan balance is more than the value of your home.
- You retain title to your home. You are the home owner with the same responsibilities you have now such as keeping current on homeowner's insurance, property taxes and mowing the lawn.
- You may sell and/or move whenever you wish. Just remember the loan is due and payable when you sell, move or pass away.
- Allows you to preserve your investments and not have to sell stocks or mutual funds that are growing or cashing in bonds or CDs that are providing income.
- If you haven't started taking Social Security yet, it allows you the choice to defer the start and generate higher monthly Social Security checks later.
- Allows you to buy a home with no monthly payments. With this choice you may be able to accept less in selling the home you are in now or allow you to invest more of the funds from that sale.
- Again, See What My Actual Borrowers Said About Their Reverse Mortgage