Image source: arlegalaid.org
A reverse mortgage is one of the valuable retirement tools that allow older people to borrow a loan. The seniors of retirement age (at least 62 years) can access home equity in form of a line of credit, a lump sum or a stream of monthly payment against their primary residence. Let’s look at reverse mortgage to determine if it right for you or not.
Pros:
1. Low-interest rates: Equity loan or reverse mortgage loan attracts low interests rates compared to other loan options.
2. Tax-free: Reverse mortgage is an advance loan and advance loans are considered non-taxable.
3. Flexible: The proceeds of the loan are flexible. You can decide to change how to receive the proceeds. Either receive through equal monthly payments or access via a line of credit.
4. Qualification is easier: The seniors can easily qualify compared to other types of loans because it doesn’t need any monthly payments. Borrowers with limited income can also borrow.
5. No monthly payments: You don’t have to make the monthly principal amount and interest payments on a reverse mortgage as long as you meet your loan obligations of paying property taxes, insurance and maintaining the property.
6. Reduces expenses: Some expenses like closing costs and ongoing fees can be financed through the reverse mortgage loan thus reducing your out-of-pocket expenses.
7. Non-recourse loan: You’re not liable for any amount of mortgage that exceeds your house value at the time of repaying the loan.
8. Revaluation of your home: If the value of your home increases, you may refinance your reverse mortgage and access more loan proceeds.
9. Drop in value: If the house value drop and its value are less than the reverse mortgage balance, you don’t have to cover the shortfall.
10. Extra equity: You can keep any remaining equity after the repayment of the loan or live it to your heirs.
Cons:
1. Low limits: The borrowing limits are much lower since the homeowner is using equity on the property. The lender can also reduce how much you can borrow based on your age.
2. Fees: Reverse mortgage incur closing costs such as origination fees, title insurance, home inspection, and appraisal. Borrowers also have to pay the mortgage insurance premium and the interest is compounded on a higher number due to the additional premiums
3. Difficult to move: If you want to move, you’re forced to repay the reverse mortgage based on the current value of the home plus the interest and fees the mortgage has accrued.
4. Spouses can get stranded: If a married couple wants to take a reverse mortgage it can prove to be challenging if one couple is below 62 years. The younger spouse can’t qualify to co-borrow on the loan.
5. The lender can foreclose: If you fail to keep up with the mortgage payment or stop using the home for more than 12 months, the lender can repossess the home.
6. Lose the house: If one of the property owners is under 62 years, he/she may have to deed off the property so that the older spouse can qualify for the loan. If the person holding the deed dies, the surviving spouse must pay the reverse mortgage in full or lose the house.
7. Affects Medicaid: Reverse mortgage can affect the need-based government programs like the Medicaid. Eligibility to other programs like the social security and Medicare are not affected.
8. Upon death: In case of your death, your estate will have to pay off your loan balance and if you move out you are given a year to repay the loan.
9. Complicated: Not many people who understand how reverse mortgages work.
10. The decrease in house value: The value of the estate inheritance can decrease with time and this affects the proceeds spent and the interest accrued on the loan balance.
