Reverse Mortgage Pros & Cons
Reverse mortgage advantages: The main advantage of a reverse mortgage is the ability to have access to your home’s equity, without making payments to your lender, while still living and owning your home. Below are some key advantages that a reverse mortgage offers.
1. Flexibility - You have complete control over how you wish to utilize your proceeds. The payments from a reverse mortgage can offer financial stability for the future. They can be used to cover pressing financial expenses; they can be used for leisure. You as a borrower have complete flexibility.
2. Low Risk - There is a low risk of losing your home. In a traditional Revolving Home Equity Line of Credit (HELOC) or Home Equity Loan, your home can be taken from you if the payments are not made. In a Reverse Mortgage, payment for the loan is not due until you move out of the home. Other than usual property expenses, no payments are required.
3. No Taxes - There are typically no federal or state income taxes on a reverse mortgage, regardless of the way you receive your proceeds.
4. Payment Control - You have control regarding how you would like to receive your payments. With six different options for receiving proceeds from the HECM reverse mortgage, you have the flexibility to receive your funds in a manner best suited for you.
5. Retain Ownership - With a reverse mortgage, you retain ownership of your home, so you can continue to live in your home.
Reverse mortgage disadvantages: Reverse mortgages can be tempting for retirees if finances are stretched or if you want some extra cash for other purposes. Still, a reverse mortgage may not be the right option. Below are some of the disadvantages to a reverse mortgage.
1. High Costs and Fees - Fees included in a reverse mortgage, like closing costs, insurance fees, and origination fees can be considered significant.
2. Accumulating Interest - Because payment for the loan is not due until you decide to move out of your home, interest increases on the loan through the years. This accumulating interest means that the amount you have to pay back increases as well.
3. Effects on Your Children - When payment for a reverse mortgage becomes due, it is likely that the adult heirs, typically the borrower’s children, will have to pay off the mortgage. Often, this is done by selling the home. This means that by selling the home to pay off the reverse mortgage, your children will not be able to inherit the home. There is also the option for your children to pay for the reverse mortgage by taking out a “forward” mortgage on the home.
If there is no way the heirs can repay the loan, the home goes to the lender. If after the home is sold, the net proceeds exceed the loan payoff, then your heirs receive that surplus of funds.
4. Impact on Medicaid Benefits - Eligibility for government programs like Medicaid can be affected by a reverse mortgage. Lump sum loan proceeds are considered an asset that would disqualify you for Medicaid. This asset would need to be spent down before you can qualify again for Medicaid.