One of the most popular options for allowing seniors to live comfortably on their own is a reverse mortgage. Done right and for the right reasons, a reverse mortgage provides funds for everything from bills to vacations, paying for in-home care, or remodeling to accommodate aging related needs.
The decision to choose a reverse mortgage should not be taken lightly. Like most things, there are pros and cons to a reverse mortgage, and it helps to know both sides of the equation before signing on the dotted line.
What is a Reverse Mortgage
Available to homeowners over the age of 62, a reverse mortgage enables you to convert part of the equity in your existing home into cash. Also known as home equity conversion mortgages, or HECMs, the “reverse” in these types of loans means the lender makes payment to you instead of the other way around.
Designed to help people in or near to retirement pay off debts (including their traditional mortgage), a reverse mortgage can also provide you with the peace of mind that comes with knowing there is plenty of readily available cash.
Pros and Cons of a Reverse Mortgage
Before making up your mind, educate yourself on the pluses and minuses of reverse mortgages.
Pros of a reverse mortgage
- Offers flexible disbursement options, such as a monthly line of credit.
- You live in the home without making monthly payments.
- Any existing mortgage is paid off.
- Children or other heirs are not personally responsible for paying off a balance that exceeds the home’s value.
- Heirs keep the remaining home equity after reverse mortgage payoff.
- Monies received are not considered income.
- Favorable interest rates.
Cons of a reverse mortgage
- The estate’s value may decrease over time as monies are spent and interest accrues on the loan.
- Fees, including an origination fee and FHA mortgage insurance premiums, are often higher than those associated with a traditional mortgage.
- Needs-based government programs such as Medicaid may be affected.
There are also certain requirements you must adhere to. For example, the person receiving the reverse mortgage must live in the home as a primary residence. Property taxes and homeowner’s insurance are paid by the property owner, who must also maintain the home to standards set by the Federal Housing Administration.
Common Misconceptions About Reverse Mortgages
Consult with us at Rick May Reverse Mortgage because we have a lot of information on reverse mortgages. Recent policy changes have made reverse mortgages less complicated, but many people still have concerns based on information taken from the days when the loans could be a lot riskier. Here are the top 5 myths you may have heard.
- Reverse mortgages are a scam. The truth is, thanks to the FHA, reverse mortgages are safer than ever. They are highly regulated, and borrowers must prove their loan worthiness.
- A surviving spouse can lose the home if the other spouse dies. Provided the surviving spouse continues to pay the property taxes, insurance, and meets all other terms of the loan, they retain ownership of the home until they die or decide to sell.
- Heirs are responsible for paying off the loan. Heirs have the option to sell the property and use the proceeds to pay back the loan, with all remaining proceeds being split among them. If you want to keep the home, you can refinance the loan. An important point to understand: if the sales proceeds do not cover the entire loan balance, the FHA pays the remainder, not the heirs.
- The bank really owns the home. The home secures the loan, but the borrowers retain ownership. Just like with a traditional mortgage, as long as the home is maintained, and property taxes and insurance are paid, the borrower continues to own the property.
- You can’t already have a mortgage on the property. Some people who obtain reverse mortgages already have full equity in their homes. But if you don’t, you do need to hold enough equity in it to pay off the balance with a reverse mortgage.
Whether you’re close to retirement and seeking ways to supplement your income, or you’re helping older parents explore a safety net for their later years, a reverse mortgage can help provide greater financial stability. Contact us at Rick May and let us explain all the pros and cons of a reverse mortgage before you make up your mind.