By now, you may have heard (or have seen a commercial endorsement) of a kind of financing option called a 'reverse mortgage.'
This kind of mortgage is frequently promoted on television as the next best things for seniors, with promises that the process is safe and practically risk free. It is easy to be skeptical about such claims, but the truth is that reverse mortgages are a good option for certain seniors in certain economic situations.
First, we will take a look at exactly what a reverse mortgage is, and then we will take a look at some of the pros and cons of reverse mortgages.
Reverse Mortgage Definition:
A reverse mortgage is a type of mortgage which allows seniors to access the equity in their homes without having to pass credit or income requirements. The qualifications for a reverse mortgage include the owner being at least 62 years old, that the home is occupied by the owner and that the owner has equity in the home.
How It Works:
In a reverse mortgage, the homeowner takes a loan against the principal amount of the home, but is under no obligation to make payments against the loan. The loan may be taken in the form of a lump sum or fixed payments. As payments are received, the owner's equity in the home decreases.
Because the loan payments are not due during the homeowner’s lifetime, the home is usually sold after the homeowner’s death in order for the lender to recoup the investment.
Pros of Reverse Mortgages
- Reverse Mortgages Are A Source Of Income – When you take equity out of your home through a reverse mortgage, you can decide on receiving a line of credit, payments or even a lump sum. For those living on a fixed income, you can supplement your income by taking a reverse mortgage and choosing the fixed payments option.
- Tax Benefits – Because the income from a reverse mortgage qualifies as a loan, the proceeds are generally tax free. However, you would want to consult your tax attorney for more specifics related to the tax implications of doing a reverse mortgage.
- Generally No Social Security Or Medicare Implications – Though reverse mortgages can be used to provide fixed payments to the homeowner, there are usually no penalties relating to social security or Medicare payments that the homeowner may currently receive.
- You Will Never Owe More Than The Home’s Value – A reverse mortgage allows you to receive fixed payments, and it is possible to receive more in payments than the value of the home. However, according to FTC guidelines, you will never owe the lender more than the home is worth.
- Equity Overage Is Yours - You or your beneficiaries will receive the overage if the home if sold for more than the loan amount.
- Title Retention – The title to the home remains in the name of the homeowner.
Cons of Reverse Mortgages
- Potential Medicaid Impact - It is possible that Medicaid eligibility could be affected by a reverse mortgage.
- Fees – In processing a reverse mortgage, lenders generally charge origination and closing costs which can equal several percentage points of the home’s value.
- Debt Counseling Requirement - Homeowners must go through mandatory debt counseling as a pre-requisite to obtaining the loan. This is meant to make sure the homeowner is fully informed about all the aspects of their decision. But, it can come off as a hassle.
- Interest Rate – Many reverse mortgage options offer variable rates. Interest rates are currently near historic lows, but could rise significantly over the course of the loan.
- Taxes And Home Owner’s Insurance – With a reverse mortgage, the home owner is still responsible for paying homeowner’s insurance and taxes. Failure to make these payments could cause the loan to be called due prematurely.
- Home Equity Used – Your home equity will be consumed by taking the mortgage. You will have fewer assets to leave to your family as a result.
Doing a reverse mortgage could be a good option for you, but you will first want to consider all of the pros and cons in light of your unique financial situation.
As always, it is advised that you consult a professional estate planner, tax attorney, or retirement professional before making a decision.