The Reverse Mortgage: Pros and Cons

A reverse mortgage can help you draw money out of your home.

The pros

Here are the main benefits of getting a reverse mortgage:

• Cash in your pocket. A reverse mortgage gives you a big bundle of money or an income stream, without which you might struggle in retirement.

• The income you receive is typically tax-free.

• You get to stay in your home while receiving payments.

The cons

Here are, however, some drawbacks to a reverse mortgage:

• Reverse mortgages have closing costs, just like regular mortgages do, and these tend to be higher. The applicable interest rates tend to be higher as well.

• Receiving income from a reverse mortgage might hurt your eligibility for various benefits, such as Medicaid and Supplemental Security Income.

• While you're living in your home with the money you received from the reverse mortgage, you'll still be responsible for expenses such as property taxes, home insurance, home repairs, and maintenance.

• Once you leave your home, it will likely need to be sold to pay off the reverse mortgage. If you had hoped to leave the home to your children, you won't be able to unless you have sufficient sums elsewhere.

• Not everyone will qualify for a reverse mortgage. If you're 62 or older and you own your home entirely, or owe very little on it, then you stand a good chance of qualifying.

• You may not be able to receive as much money as you'd like. The amount you can borrow depends on several factors, such as how much longer you (and your spouse, if you have one) are expected to live, the value of the house, the equity you have in the house, and prevailing interest rates. Interest charges are added to the balance of the loan over time.

The bigger the home value and your equity in it, the more you can get from a reverse mortgage.

More to know

If you decide you're interested in a reverse mortgage, there's more to learn about. For example, there are three main kinds. The vast majority -- about 90% -- are federally insured home equity conversion mortgages, backed by the U.S. Department of Housing and Urban Development. There are also proprietary reverse mortgages, which are private loans, as well as single-purpose reverse mortgages, which some state and local government agencies and some nonprofit organizations offer primarily to lower-income folks to help them cover a single major expense, such as a home improvement.

Because reverse mortgages are complex, applicants are often required to consult a profession and explore alternatives. That's a good thing, because some people, especially the elderly, receive hard sells by salespeople who aren't looking out for their best interests. It's often smart for younger friends or family members to get involved and assess both the situation and any reverse mortgages offered.

What to do

The average Social Security benefit, as of September 2015, was $1,338 per month, or about $16,000 per year. Unless you have other income streams on the side, that won't be enough to live on, so building additional income streams is a smart thing to do. Before opting for a reverse mortgage, consult with a financial advisor or two to explore all your options.

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The article The Reverse Mortgage: Pros and Cons originally appeared on Fool.com.

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