Advantages and Disadvantages of Reverse Mortgages
Getting a reverse mortgage is one option for seniors looking for financial stability during retirement. Applicants interested in obtaining this type of mortgage could greatly benefit by doing so. But that doesn’t mean there aren’t any drawbacks to consider as well. Everyone’s situation is different, so what is a good financial decision for one person may not be for another. Take some time to examine both the advantages and the disadvantages of a reverse mortgage before you decide if it’s right for you.
Reverse mortgages, also known as home equity conversion mortgages (HECM), appeal to homeowners for a number of reasons. For example, because they are federally-insured through a Federal Housing Administration-approved lender, borrowers have more protection than if they took out unregulated loans.
Reverse mortgages allow borrowers to receive an increased (and tax-free) income without giving up their ownership in the home or making monthly payments to their mortgage lender. However, they would still need to pay other bills, such as homeowner’s insurance and property taxes. But they do not have to make any payments to the lender unless something changes in their arrangement and they no longer meet the reverse mortgage requirements. Kiplinger, a business and personal finance publisher based in Washington D.C., also notes that what borrowers receive does not impact what they pay for Medicare or their ability to qualify for Medicaid.
With reverse mortgages, borrowers have more financial freedom. They can use the capital they receive to enjoy their retirement or pay other expenses, like medical bills. Some may even choose to put that money back into their homes in order to increase the value or finally update their kitchen or outdoor space, for example. People can even use a reverse mortgage to help buy a new home if they are looking to move.
If the borrower passes away, his or her spouse can remain in the home under the Mortgagee Optional Election Assignment Program. The policy gives “lenders the option to delay calling HECMs with eligible ‘non-borrowing spouses’ due and payable,” as reported by the U.S. Department of Housing and Urban Development. There are certain prerequisites that seniors must meet in order to be eligible, including the time in which the reverse mortgage was assigned (before August 4, 2014).
Further, those who inherit the home after a borrower passes away can decide either to keep the property and reimburse the lender or sell the property and put that capital toward repaying the loan. If they choose the latter, the borrower’s family would not need to pay out-of-pocket, even if what’s owed to the lender is more than what the home sells for.
Even though it sounds like anyone 62 years of age or older can qualify for this type of mortgage loan, that isn’t necessarily the case. Before they approve a reverse mortgage, lenders want to know that the borrower can afford to pay the homeowner’s insurance and property taxes for years to come. Prospective borrowers must provide their income information, such as tax returns and paystubs, which could hurt some people’s chances of getting the loan.
Plus, only certain types of properties can be approved. Primary residencies, yes. Vacation homes, no. In fact, a recent study featured in Reverse Mortgage magazine, a publication by the National Reverse Mortgage Lenders Association, reveals that 22 percent of participants did not get a reverse mortgage due to “property ineligibility.”
Another drawback to getting a reverse mortgage is that it often has higher interest rates than regular mortgages and other refinancing options. This difference can be significant when the mortgage payment is due. As pointed out by U.S. Department of Health and Human Services, people who get a reverse mortgage will owe more money than people who get a traditional mortgage and their home equity depreciates as times goes on.
As explained above, inheritors of the home have to repay the lender with their own money if they want to keep it, and they may be unable to afford that expense. Although they do have the option of selling, those who have a sentimental attachment to the property may find it difficult to let it go. Consequently, if they do sell the home, they likely won’t see any of equity from the sale, as it will be used to cover the reverse mortgage costs.
Again, what is going to influence your decision to get a reverse mortgage is your own financial circumstances. You should do as much research as you can and consult with mortgage loan professionals for their expert opinions before you decide whether a reverse mortgage is right for you.
Reverse mortgages are means of borrowing money against the values of homes. If you are a homeowner then you can essentially use this type of loan to convert part of your home equity into spendable cash without having to pay the money back until you pass away or choose to leave your home. That can come in handy when you need to pay medical expenses, make expensive repairs to your property, or take care of any other financial obligations that you may find it difficult to meet on your fixed income during retirement. Basically a reverse mortgage loan option can give you more financial flexibility, as long as you don’t plan to move out of your home in the near future.