Pros and Cons of a Reverse Mortgage

Pros and Cons of a Reverse Mortgage

Dollar and tiny home balanced on wood balance

Reverse mortgages have become popularized by television commercials anchored by celebrities. To some, they may seem too good to be true. But reverse mortgages are not all Hollywood glitz and glamour. They are a way for homeowners, now as young as 55 or older, to convert the equity in their homes into spendable cash. Though not for everyone, many seniors are using their home equity to fund their retirement, cover expenses, and remain in their home without worries of budget constraints. Reverse mortgages can make this possible.

Pros of a Reverse Mortgage

You Can Better Manage Expenses During Retirement.

Once you retire, your income may substantially decrease. And you may encounter expenses that were unplanned, such as medical-related costs that are not covered by insurance or home or vehicle repairs. Depending on your retirement income, a reverse mortgage can also generate funds for other expenses that your regular budgeted income won’t cover. With a reverse mortgage, you can use the funds in any way you want, so you can preserve your wealth, while also mitigating risk.

You Don’t Have to Pay Taxes on the Income.

The funds from a reverse mortgage are not considered income because they are proceeds of a loan. But with a reverse mortgage, you do not have to pay back the loan until you move from your home or trigger a maturity event, like passing away. At that time, the loan could be repaid with the money from the home’s sale, or other funds if the heirs desire to retain the home.

Line of Credit Like a Security Net.

Many homeowners decide to apply for a reverse mortgage on their home, not just because they need the money, but because they realize the investment strategy or insurance policy potential that can extend retirement savings and provide tax-free income while keeping you in your home.

A reverse mortgage can allow you to leverage your home as an asset to maintain other investments when used with discretion. Using funds from your reverse mortgage instead of accessing other retirement savings can allow you to avoid tax implications, penalties or other costs.

You Don’t Have to Move.

Often, homeowners find that they cannot afford to live in their home when their income decreases due to retirement. But moving is stressful and expensive. A reverse mortgage allows homeowners aged 55+ to age in place in the home and neighborhood where they are comfortable.

You Are Protected if the Balance Exceeds Your Home’s Value.

Reverse mortgages can sometimes exceed the value of the home. Sometimes the cost of the loan, when added to the balance, or the natural swing in the real estate market, could make the homeowner’s reverse mortgage balance greater than the property’s fair market value. With reverse mortgages, lenders cannot attach liens or lay claims against other property of the mortgage holder or their heirs. This is known as a non-recourse feature, and makes reverse mortgages one of the safest mortgage options. You will never be required to pay back more than the value of the home, even if the loan balance is higher.

Your Heirs Have Options.

Even if you have a reverse mortgage, your heirs will still have options if you pass away. Of course, they can sell the home and retain any funds over the loan amount. They could take out a mortgage to pay off the reverse mortgage and then use the property however they like. Because reverse mortgages are made specifically for seniors and they are non-recourse, the program is built with the natural cycle of life in mind. When you pass away with a reverse mortgage, your heirs will need to contact your servicing company and keep in touch with them about their plans with the home.

Cons of a Reverse Mortgage

You Have To Pay for It.

As with any loan, there are costs to borrowing money. You will encounter typical expenses such as closing costs, but unlike a traditional mortgage, you will not be making a monthly mortgage payment on the balance.

You Could Inadvertently Violate Other Program Requirements.

If you currently qualify for Medicaid or Supplemental Security Income programs, there are certain asset restrictions to benefit from the programs. Carrying too large of a balance in your bank account could cause you to violate those requirements, so getting the advice of Medicaid or SSI Advisor is best before finalizing a reverse mortgage. Most will be able to help you stay within your restricted asset requirements or steer you to other programs that may be beneficial.

Learn More About your Reverse Mortgage Options

Reverse mortgages may not be for everyone, but they provide a way to live a comfortable, secure retirement for homeowners aged 55+. Northwest Reverse Mortgage has the experts you need to help you choose the right plan for you. We can help determine your eligibility and explain the different types of reverse mortgages available. Contact us today to set an appointment, join us for our next reverse mortgage seminar, or take our quick assessment to find out if a reverse mortgage is right for you!

Image source: William Potter / Shutterstock

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Northwest Reverse Mortgage, LLC. ML- 5797/ CL-1834787/ DFPI# 60DBO-140333. Equal Opportunity Mortgage Broker licensed in Oregon, Washington, Idaho and California. Licensed by the Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act. Credit on approval. Terms subject to change without notice. Not a commitment to lend. Contents not provided by, or approved by FHA, HUD or any other government agency. All potential tax benefits should be verified with a professional licensed tax advisor. NMLS Consumer Access

At the conclusion of a reverse mortgage, the borrower must repay the loan and may have to sell the home or repay the loan from other proceeds; charges will be assessed with the loan, including an origination fee, closing costs, mortgage insurance premiums and servicing fees; the loan balance grows over time and interest is charged on the outstanding balance; the borrower remains responsible for property taxes, hazard insurance and home maintenance, and failure to pay these amounts may result in the loss of the home; interest on a reverse mortgage is not tax deductible until the borrower makes partial or full re-payment.