Reverse Mortgage Pros and Cons
Pros of Reverse Mortgages
- Allows the homeowner to stay in the home.
- Can pay off existing mortgages on the home.
- No monthly mortgage payments are required, however the homeowner must live in the home as their primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements. Failure to meet these requirements can trigger a loan default that results in foreclosure.
- The homeowner receives payments on flexible terms:
- Credit line for emergencies
- Monthly payments
- Lump sum distribution
- Any combination of the above
- A reverse mortgage can not get upside down so the heirs will never be personally liable for more than the home is sold for.
- Heirs inherit the home and keep any remaining equity after the balance of the reverse mortgage is paid off.
- Loan proceeds are not taxed as income or otherwise (though you must continue to pay required property taxes).
- The interest rate may be lower than traditional mortgages and home equity loans.
Reverse Mortgage Cons
- The fees on a reverse mortgage are the same as a traditional FHA mortgage but are higher than a conventional mortgage because of the insurance cost. The largest costs are:
- FHA mortgage insurance
- Origination fee
- The loan balance gets larger over time and the value of the estate/inheritance may decrease over time.
- A reverse mortgage loan usually does not affect eligibility for entitlement programs, such as Medicare or Social Security benefits. However, some needs based government benefits such as Medicaid and Supplemental Security Income (SSI) may be affected by a reverse mortgage loan. You should consult a qualified professional to determine if there would be any impact to your government benefits.
- The program is not well understood by most individuals. However, the availability of independent reverse mortgage counseling helps.
Next Step: Take 3 minutes now to calculate your eligibility for a reverse mortgage loan below.