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The Pros and Cons of a Reverse Mortgage

A reverse mortgage can be a valuable retirement planning tool, which can greatly increase a retiree’s income stream using their largest asset: their home.  A reverse mortgage allows homeowners to borrow against their home’s equity, while still maintaining ownership of the home.  The best part about a reverse mortgage is that unlike conventional mortgages, there are no payments involved. Instead, the lender makes payments to the borrower either through a lump sum, monthly payments, or a line of credit.

The reverse mortgage is repaid when the borrower dies, permanently moves from the residence, or the property is sold. Instead of you paying the bank monthly and the equity growing, the bank pays you monthly, and the equity might shrink.  It is also important to remember that you must be 62 in order to qualify.


How Can a Reverse Mortgage Benefit Me?


            A reverse mortgage can be a powerful source of funding for individuals who need to increase their income to be comfortable in retirement.  The largest personal asset most retirees possess is their home. In most cases, a retirees home is paid off.  A reverse mortgage increases income without increasing monthly payments and allows you to stay in your home.

            The amount you are eligible for is based on several things, most importantly, the value of your house, your age, and interest rates. You are eligible for more money the older you are, the more your house is worth, and the lower current interest rates are.


A Look at the Negative

             One of the negatives of a reverse mortgage are the costs involved.  All mortgages have costs, but reverse mortgage fees, which can include the interest rate, loan origination fee, mortgage insurance fee, appraisal fee, title insurance fees, and various other closing costs, are extremely high when compared with a traditional mortgage. Costs vary but can be as high as $30,000 or $40,000.  This cost is not paid out of pocket, but rolled into the loan. 

            Another situation to be aware of is the requirement to pay back the loan if you should permanently move out of the house.  This may not sound like a problem now, but if you ever need to enter a full-time care facility, the loan would become due if you left your home for a year or more. 

            The final downside to the reverse mortgage affects your estate.  The reverse will almost always decrease the equity in your home, which will leave less money to your heirs. 


Myth versus Truth


Myth: The lender takes title to the home.

Truth: You still retain ownership of your home.  The reverse mortgage is only a lien against the property. 

Myth: The loan can exceed the value of the property, sticking you or your heirs with a large bill when you eventually leave your home. 

Truth: A reverse mortgage is a “non-recourse” loan, which means that you, your heirs, or your estate will never owe more than the appraised value of the home at loan maturity.

Myth: You can’t get a reverse mortgage if you currently have a conventional mortgage. 

Truth: Although this is true, you can get a reverse if you use the proceeds to pay off your existing mortgage at close. 

Myth: A reverse mortgage can cause you to be evicted from your home.

Truth: You leave your home when you choose. No one will force you from your home. The reverse mortgage is not due until your home is no longer your primary residence. 

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