Reverse Mortgage: What Are the Pros & Cons?
When implemented correctly, a reverse mortgage can offer a great amount of stability and security to retirement. They offer fast cash and long-term care funding solutions. However, they’re not for everyone.
“Reverse mortgages can be powerful cash generators in those post-career years, when used properly.”
Advertisement.Bob Carlson, Retirement Watch
What Is a Reverse Mortgage?
A reverse mortgage is a loan available to homeowners over the age of 62. Just as the name suggests, it’s the opposite of a traditional mortgage. A lender gives money to the homeowner based upon acquired home equity. The homeowner will receive monthly payments, one lump sum, or a line of credit. Unlike a traditional mortgage, the homeowner is not required to make monthly payments. Instead, the entire loan is repaid either when the house is sold, or when the homeowner passes away.
Pros
Income Boost – Seniors can get a significant boost to their income! Homeowners can choose how to receive their payment. These loans can be great for seniors who could use extra money to help pay bills or just want to supplement their income. Seniors with considerable home equity can use a reverse mortgage to help pay off their existing mortgage, and then have extra cash on hand. The borrower usually has freedom with how they spend their money. However, keep in mind that sometimes there will be restrictions. Make sure you ask questions!
Non-Taxable – Money received from a reverse mortgage is non-taxable. The lender pays the homeowner (money from the reverse mortgage) while they continue to live in the home. Since the IRS considers reverse mortgage payments as loan proceeds rather than income, they are not taxable. But, keep in mind, tax rules can seem very complicated. Consulting with a financial advisor is a good idea.
No Monthly Payments – You aren’t required to make monthly payments. Instead, the loan balance (including all fees and accumulated interest) is paid back upon the homeowner’s death or the sale of the home. The loan stays active so long as the borrower meets their loan obligations (paying taxes, insurance, and maintenance).
Cons
Costs and Fees – A reverse mortgage is not just free money. There are actually many added costs. Lender fees, FHA insurance charges, and closing costs are just a few. These additional fees are added to the total loan balance. This results in a homeowner having more debt as time goes on. Also, since a reverse mortgage uses home equity, fewer assets are left for heirs.
Possibility of Foreclosure – Even though a monthly payment isn’t required, foreclosure can still be a potential risk. If a homeowner does not keep up with property taxes, regular bills, insurance, or the property’s maintenance, then the loan can become due early. If the homeowner is unable to reconcile these issues, the home could move to foreclosure. This is a serious risk.
Risk of Fraud – Seniors have long been prime targets for people looking to take advantage of others. Many scams involve “lenders” pitching overly complicated reverse mortgage plans that involve phony home value appraisals and inaccurate loan documents. These cons will often try to steal equity from a flipped property, leaving their victim with a mountain of debt.
Considering a Reverse Mortgage
A reverse mortgage might just be right for you! But, before making a decision, it’s best to consult with family or a financial advisor.
Shop around. Compare lenders. Weigh your options. And, don’t forget to ask questions!
Looking for senior housing or long-term care? Then, Start here!
Need financial advice? Bob Carlson, of Retirement Watch, can help!
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Originally published March 15, 2022
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