5 Pros & Cons of Reverse Mortgages

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Are you a homeowner or someone who’s about to retire from your job? If yes, then you might have given the TV or radio ads about the reserve mortgages a thought.  According to Statista, the number of people who will get Social Security benefits has reached 48.59 million in 2022.

This figure has increased from around 34.59 million in 2010. The aging U.S. population means more people will continue to retire in the upcoming years. Therefore, these loans sound intriguing to those about to retire, particularly if most of your net worth is tied to your house.

So, what is a reverse mortgage? What advantages and disadvantages must you weigh before deciding? We’ll discuss all these things about reverse mortgages in this article.

What Is a Reverse Mortgage?

If you’re 62 or older and own a house, you can borrow against it for cash. The only difference between a reverse and a typical mortgage is that no monthly payments are required. You or your heirs will pay the loan after the house is sold.

The borrowers would have to pay a premium to participate in this scheme, which is used for the (Federal Housing Administration reserves. The FHA will use the funds to repay the debt if the borrower can’t pay it back. Apart from being 62, you must also fulfill other requirements the FHA sets for the HECM.

How Do Reverse Mortgages Work?

Reverse mortgages work in the opposite way of a regular mortgage. In this type of loan, the lender will make payments in the following ways:

  • Monthly payments
  • Lump sum
  • Line of credit
  • Mixtures of all these

The fees and interest will roll into the balance each month. Therefore, the amount you own will increase with time, whereas your home equity will go down. You’ll have the home’s title and only have to pay for the loan once you die or sell it.

Once that happens, the proceeds from your home will be adjusted for debt repayments. Any equity that is left will be given to the heirs. If not, the heir won’t have to pay the differential amount. They can also choose to refinance or clear the reverse mortgage.

Pros of Reverse Mortgage:

A reverse mortgage might help those struggling to pay their bills to keep things afloat. Here are some pros of going for the reverse mortgage:

  1. Gives You Funds for Retirement:

Reverse mortgages can be optimal for those who don’t have any cash holdings but whose wealth is tied in their homes. To maintain their standard of living in their retirement years, they can use it to liquidate their asset.

  1. Allows You to Stay in Your Home:

You can have access to cash without having to sell your home. Consequently, it saves you from worrying about moving out of the neighborhood or into a smaller home.

  1. Helps You Pay off Your Current Home Loan:

You can obtain a reverse mortgage even if your house isn’t completely paid off. You can clear your current home mortgage with the money from a reverse mortgage. Consequently, it makes money available to use for other costs.

  1. Saves You from Tax Liability:

The IRS considers the money from a reverse mortgage as a loan instead of income. So, you don’t need to pay taxes that you pay on other retirement plans, like 401(k) or IRA.

  1. Protects Your Balance If it is More Than the Property’s Value:

Your home’s value might only sometimes be sufficient to cover the loan. In that case, your heirs won’t have to pay the balance.

Cons of Reverse Mortgage:

While the benefits might sound fascinating, there are some drawbacks of reverse mortgages that you need to consider as well:

  1. Chance of Losing Your Home:

You must afford insurance, HOA charges, property taxes, and other living expenses to get a reverse mortgage.

  1. Lower Inheritance for Your Heirs:

Homeownership plays a vital role in creating generational wealth. But, with a reverse mortgage, your heirs would have to sell the house to repay the debt. Since the heir has to pay the entire loan or close to 95% of the property’s estimated value, they would have to sell the house. Furthermore, the reverse mortgage takes away the home’s equity. So, there won’t be any equity left for your heir by the time it needs to be paid off.

  1. It Can Come with a Significant Cost:

Although you won’t need to make payments, a reverse mortgage does involve extra charges. For instance, you must pay your taxes and an upfront insurance premium. This is around 2% of your home’s estimated value. Additionally, there is an origination fee that you need to pay at closing. While you can roll it over, it would give you less money.

  1. Complicated and Difficult to Understand:

Reverse mortgages come with a wide range of rules and caveats. There are specific risks that come with it that might not make a reverse mortgage an ideal option for you. So, it is vital to understand the terms properly before signing any deal.

  1. Impact Your Retirement Options:

Reverse mortgages can also make qualifying for other government programs like Supplemental Security Income (SSI) or Medicaid challenging. You should discuss your situation with a benefits specialist to know about eligibility.

Planning for your retirement is essential, mainly because of high inflation. You should review the pros and cons of reverse mortgages and then decide whether or not it is a suitable option.


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