Pros and Cons of Reverse Mortgages

Pros and Cons of Reverse Mortgages

 


Pros and Cons

Pros and Cons of Reverse MortgagesReverse Mortgage Positives

  • Allows the homeowner to stay in the home permanently.
  • Pays off existing mortgages. About half of all Reverse Mortgages are used to pay off an existing mortgage.
  • Simple to qualify for because credit score and income are not considered.
  • No monthly payments are due for as long as the homeowner lives in the home.
  • The homeowner receives payments on flexible terms:
    • Credit line for emergencies
    • Monthly income
    • Lump sum distribution
    • Any combination of the above
  • A reverse mortgage can not get “upside down” so the heirs will never owe more than the home is worth.
  • Heirs inherit the home and keep the remaining equity after the balance of the reverse mortgage is paid off.
  • Proceeds are not taxable, generally.
  • The interest rate is lower than traditional mortgages and home equity loans.

Reverse Mortgage Negatives
The fees on a reverse mortgage are the same as a traditional FHA mortgage but are higher than a conventional mortgage because of the insurance cost.

The largest costs are:

  • FHA mortgage insurance
  • (HECM Saver dramatically reduces FHA mortgage insurance from 2% to .01%)
  • Origination fee

 

Although Social Security and Medicare are not affected, Medicaid and other need-based government assistance can be affected if too much funds are withdrawn (and not spent) in one month.

The program is not well understood by most individuals. However, the availability of independent free reverse mortgage counseling helps.