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Reverse Mortgage PROS and CONS Explained

Reverse Mortgage PROS and CONS
Reverse Mortgage PROS and CONS
Brian Reese
June 7, 2024

If you’re at least 62 years old and concerned about affording your retirement, a reverse mortgage could be a viable solution.

However, this financial product can be complex and comes with potential drawbacks, so it’s critical to fully understand how it works.

In this article, we’ll explore the pros and cons of reverse mortgages and provide expert tips and strategies to help you make an informed decision.

Let’s dive in!

What is a Reverse Mortgage?

A reverse mortgage is a loan available to homeowners who are 62 years or older, allowing them to convert part of the equity in their home into cash.

The homeowner can receive funds as a lump sum, fixed monthly payment, or line of credit.

Unlike traditional mortgages, there are no monthly mortgage payments.

The loan is repaid when the borrower moves out or passes away.

Reverse Mortgage Basic Eligibility Requirements

Here are the key requirements to qualify for a reverse mortgage:

  • Age Requirement: You must be at least 62 years old.
  • Primary Residence: The loan can only be taken out on your primary residence, not on a second home or vacation property.
  • Counseling and Assessment: To obtain a Home Equity Conversion Mortgage (HECM), you must attend a reverse mortgage counseling session mandated by the U.S. Department of Housing and Urban Development (HUD). Additionally, a financial assessment is required to ensure you can meet the ongoing financial obligations of the loan.
  • No Federal Debt: You cannot owe any federal debt, such as student loans or income tax.
  • Property Standards: The property must meet specific standards set by the relevant authorities.

Table of Reverse Mortgage Pros and Cons

PROSCONS
Staying in Your Home: Allows you to stay in your home longer than you might otherwise be able to afford.Decrease in Equity: The loan balance increases over time, reducing the equity in your home.
No Monthly Mortgage Payments: You don’t have to make monthly mortgage payments, freeing up cash flow.Loan Balance Increases: Interest and fees accumulate, increasing the loan balance.
Flexible Disbursement Options: Funds can be received as a lump sum, monthly payments, line of credit, or a combination.Possibility of Outliving Benefits: You might outlive the benefits of the loan, potentially facing financial difficulties later.
Non-Recourse Loan: You or your heirs will never owe more than the home’s value at the time of sale.Scams and Fraud: The reverse mortgage market can be susceptible to scams and fraudulent schemes.
Potential for Tax-Free Income: The proceeds from a reverse mortgage are generally not considered taxable income.Impact on Estate: Having a smaller estate to leave to heirs due to the increasing loan balance.
Spousal Protections: Your spouse may be able to stay in the home even if you pass away, depending on eligibility and loan terms.Impact on Benefits: Could affect eligibility for means-tested government programs like Medicaid.
Use for Long-Term Care: Funds can be used for home modifications or long-term care needs, allowing aging in place.Costly Fees and Interest: Origination fees, mortgage insurance premiums, and other costs can be high.
Potential for Property Value Appreciation: Immunity to devaluation if the property value decreases, thanks to the non-recourse nature of the loan.Financial Obligations: You must continue to pay property taxes, homeowners insurance, and maintenance costs.

PROS of Reverse Mortgages

No Monthly Mortgage Payments

  • Borrowers are not required to make monthly payments towards the loan balance, which can significantly ease financial pressure on those with limited retirement income.

Flexible Disbursement Options

  • The funds from a reverse mortgage can be received in multiple ways (lump sum, monthly payments, or line of credit), providing flexibility based on the homeowner’s needs.

Stay in Your Home

  • Borrowers can remain in their home and retain ownership, providing comfort and stability during their retirement years.

Non-Recourse Loan

  • If the loan balance exceeds the home’s value at repayment, neither the borrower nor the heirs are responsible for paying the difference, assuming the home is sold to pay off the loan.

CONS of Reverse Mortgages

High Fees and Interest

  • Reverse mortgages often come with high closing costs, fees, and interest rates, which can significantly reduce the equity a homeowner has in their home over time.

Impact on Inheritance

  • Because the loan must be repaid from the sale of the home, heirs may receive much less than expected or nothing at all if home equity is completely used up.

Risk of Foreclosure

  • Failure to meet the loan conditions such as paying property taxes and insurance, or maintaining the home, can lead to foreclosure.

Complexity

  • The details and conditions of reverse mortgages can be complex and difficult to understand, making it easy for borrowers to make costly mistakes.

Expert Tips and Strategies for Reverse Mortgages

Reverse mortgages can be a beneficial financial tool for many seniors, but they require careful consideration and planning.

Here’s 7 expert tips and strategies to help you make the most informed decision:

#1. Understand the Different Types of Reverse Mortgages

  • Home Equity Conversion Mortgages (HECMs): These are the most common type, insured by the Federal Housing Administration (FHA). They have strict regulations and protections for borrowers.
  • Proprietary Reverse Mortgages: These are private loans backed by the companies that develop them and are typically available for higher-value homes.
  • Single-Purpose Reverse Mortgages: Offered by some state and local government agencies and nonprofit organizations, these are usually the least expensive option but can only be used for a specific purpose, such as home repairs or property taxes.

#2. Consider the Alternatives

Before committing to a reverse mortgage, explore other financial options:

  • Home Equity Loans or Lines of Credit: These might have lower fees and better terms if you have sufficient income to make the payments.
  • Downsizing: Selling your home and moving to a smaller, more affordable property can free up equity without the need for a loan.
  • State and Local Programs: Some states and local governments offer programs to help seniors with home expenses, property taxes, or necessary repairs.

#3. Calculate the Total Cost

Reverse mortgages come with various costs, including:

  • Origination Fees: Charged by the lender for processing the loan. You can shop different lenders to ensure you’re getting the best deal.
  • Mortgage Insurance Premiums (MIP): Required for HECMs, this protects you and your heirs from owing more than the home’s value.
  • Servicing Fees: Ongoing fees for maintaining and monitoring the loan.
  • Interest Rates: Variable rates can change over time, affecting the amount owed.
  • Calculator: Use a reverse mortgage calculator to estimate your total cost.

#4. Plan for the Future

Think long-term about how a reverse mortgage fits into your overall financial plan:

  • Longevity: Consider how long you plan to stay in your home. A reverse mortgage may not be beneficial if you plan to move in the near future.
  • Heirs and Estate Planning: Understand how the loan will impact your estate and communicate with your heirs about your plans.
  • Future Needs: Consider potential future expenses, such as medical costs or long-term care, and how they will be funded.

#5. Maintain Your Home

To keep your reverse mortgage in good standing, you must:

  • Pay Property Taxes and Insurance: Failure to do so can result in foreclosure.
  • Maintain the Home: Keep the property in good repair to meet the loan requirements and maintain its value.
  • Utilize a Set-Aside for Taxes and Insurance: If you’re worried about managing these payments, you can set aside a portion of the loan proceeds to cover these expenses.

#6. Consult with a HUD-Approved Counselor

Before finalizing a reverse mortgage, you must undergo counseling with a HUD-approved counselor.

This session will help ensure you understand the loan terms, costs, and implications. Here are some tips for this session:

  • Prepare Questions: Make a list of questions to ask the counselor about the specifics of the loan and your situation.
  • Bring Documentation: Have all your financial documents ready to discuss your financial situation in detail.
  • Evaluate All Information: Use the counselor’s advice to evaluate whether a reverse mortgage is the right option for you.

#7. Monitor Your Loan

Once you have a reverse mortgage, keep a close eye on your loan:

  • Regular Statements: Review your loan statements regularly to track interest accumulation and loan balance.
  • Budgeting: Include any potential costs related to the reverse mortgage in your budget planning.
  • Reassessment: Periodically reassess your financial situation and the benefits of the reverse mortgage to ensure it remains a beneficial choice.

Example Reverse Mortgage Scenario

Here’s an example of a reverse mortgage situation for Jane Doe with a $850,000 home value, a mortgage balance of $200,000 and monthly income of $1,500 each month from Social Security benefits.

  • Homeowner: Jane Doe
  • Age: 70
  • Home Value: $850,000
  • Mortgage Balance: $200,000
  • Location: Arizona
  • Income: $1,500 per month from Social Security

Jane’s Financial Situation and Goals

Jane has lived in her home for 30 years and has built up significant equity.

However, she finds it challenging to cover her monthly expenses with her fixed income.

She wants to stay in her home but needs additional funds to cover living expenses, medical bills, and home maintenance.

Considering a Reverse Mortgage

Jane explores a Home Equity Conversion Mortgage (HECM), the most common type of reverse mortgage insured by the FHA.

Step-by-Step Process

  1. Initial Counseling: Jane meets with a HUD-approved counselor to understand the reverse mortgage terms, costs, and implications. The counselor helps her determine if this is the right option for her.
  2. Loan Application: Jane applies for a reverse mortgage. The lender evaluates her home value, mortgage balance, age, and current interest rates to determine her loan amount.
  3. Loan Calculation: Based on Jane’s age (70), home value ($850,000), and current interest rates, the lender calculates she can borrow up to approximately $450,000, after accounting for her existing mortgage balance of $200,000.
  4. Disbursement Options: Jane chooses how to receive her funds. She opts for a combination of a lump sum to pay off her existing mortgage and a line of credit for future expenses.

Financial Outcome

  • Lump Sum Payment: Jane receives $200,000 upfront to pay off her existing mortgage.
  • Line of Credit: Jane has access to the remaining $250,000 as a line of credit, which she can draw from as needed.

Benefits for Jane

  1. Eliminates Monthly Mortgage Payments: By paying off her existing mortgage, Jane no longer has to make monthly mortgage payments, reducing her financial burden.
  2. Access to Funds: The line of credit provides Jane with a financial safety net. She can use these funds for medical expenses, home repairs, or any other needs.
  3. Stay in Her Home: Jane can remain in her home, which provides her with stability and comfort.

Responsibilities and Considerations

  1. Property Taxes and Insurance: Jane must continue to pay property taxes and homeowners insurance to avoid foreclosure.
  2. Home Maintenance: Jane needs to maintain her home in good condition to meet the loan requirements.
  3. Interest and Fees: The loan balance will grow over time due to interest and fees. Jane and her heirs need to understand this and plan accordingly.
  4. Repayment: The loan will be repaid when Jane moves out, sells the home, or passes away. If the loan balance exceeds the home’s value, FHA insurance covers the difference, protecting her heirs from owing more than the home’s value.

Reverse Mortgages: Frequently Asked Questions (FAQs)

1. What is a reverse mortgage?

A reverse mortgage is a loan that allows homeowners aged 62 and older to convert part of the equity in their home into cash without having to sell their home or make monthly mortgage payments. The loan is repaid when the borrower sells the home, moves out permanently, or passes away.

2. Who is eligible for a reverse mortgage?

Eligibility requirements include:

  • Homeowners must be at least 62 years old.
  • The home must be the borrower’s primary residence.
  • The homeowner must have significant equity in the home.
  • The property must meet FHA standards if applying for a Home Equity Conversion Mortgage (HECM).

3. What types of homes qualify for a reverse mortgage?

Eligible properties include single-family homes, multi-family homes (up to four units), FHA-approved condominiums, and some manufactured homes that meet FHA standards.

4. How does a reverse mortgage work?

Instead of making monthly mortgage payments, borrowers receive payments from the lender. The loan balance increases over time as interest and fees accumulate, and the homeowner’s equity decreases.

5. What are the different types of reverse mortgages?

  • Home Equity Conversion Mortgage (HECM): The most common type, insured by the FHA.
  • Proprietary Reverse Mortgages: Private loans for higher-value homes.
  • Single-Purpose Reverse Mortgages: Offered by some state and local governments or nonprofits for specific purposes like home repairs or property taxes.

6. How can I receive the funds from a reverse mortgage?

Borrowers can choose from several disbursement options, including a lump sum, monthly payments, a line of credit, or a combination of these.

7. Are reverse mortgage proceeds taxable?

No, the proceeds from a reverse mortgage are not considered taxable income and do not affect Social Security or Medicare benefits.

8. What are the costs associated with a reverse mortgage?

Costs can include origination fees, mortgage insurance premiums, closing costs, and servicing fees. These costs can be financed into the loan.

9. Do I still own my home with a reverse mortgage?

Yes, the borrower retains ownership of the home and must continue to pay property taxes, homeowners insurance, and maintain the property.

10. What happens to my reverse mortgage if I die or move out?

The loan becomes due when the borrower sells the home, moves out permanently, or passes away. The home can be sold to repay the loan, and any remaining equity belongs to the borrower or their heirs.

11. Can I lose my home with a reverse mortgage?

Yes, but only if the borrower fails to meet the loan obligations, such as paying property taxes, homeowners insurance, or maintaining the home.

12. How does a reverse mortgage affect my heirs?

Heirs can inherit the home but must repay the reverse mortgage loan balance. This can be done by selling the home, refinancing, or using other funds.

13. Is counseling required for a reverse mortgage?

Yes, for HECM loans, HUD-approved counseling is mandatory to ensure borrowers understand the terms, costs, and implications of the loan.

14. Can I get a reverse mortgage if I have an existing mortgage?

Yes, but the existing mortgage must be paid off with the proceeds from the reverse mortgage.

15. What is a non-recourse loan?

A non-recourse loan means the borrower or their heirs will not owe more than the home’s value when the loan is repaid, even if the loan balance exceeds the home’s value.

Need a Reverse Mortgage Quote? WE CAN HELP!

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  • District Lending is on a mission to disrupt the traditional mortgage industry. Buying a home can be incredibly frustrating so we decided to make it EASY through our technology and exceptional customer service! Yes, we also have expertise to help you navigate the complexities of reverse mortgages.
  • Lower rates. Zero lender fees. As a mortgage broker, we have access to over 50 lenders. This means that you have more options to choose from, making it easier to find the perfect loan. What makes us different is that we’re able to offer great low rates to consumers every single day (we have very low overhead with no layers of overpaid middle management). Check Today’s Rates Now!
  • We’re extremely fast to close, but never cut corners. We’ve engineered our process to close a loan in as little as 18 days. We also monitor our competitors’ rates and always make sure ours are lower.

>> Click HERE to get a reverse mortgage rate in 60 seconds or less!

Questions About Reverse Mortgages? WE’VE GOT ANSWERS!

You’ve got questions…

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If you have questions about a reverse mortgage, you can get in touch with us HERE.

*We respond to all inquiries within 2 business hours.

About the Author

Brian Reese is a senior advisor and co-owner at District Lending. He is one of the world’s leading experts in veteran benefits, having helped millions of veterans secure their financial future since 2013. Brian is the founder VA Claims Insider, an education-based Coaching & Consulting company whose mission is to educate and empower veterans to get the VA disability benefits they’ve earned for their honorable service. A former active-duty air force officer, Brian deployed to Afghanistan in support of Operation Enduring Freedom. He is a distinguished graduate of management of the United States Air Force Academy and earned his MBA as a National Honor Scholar from the Spears School of Business at Oklahoma State University.

“As a military veteran, I’ve made it my life’s mission to help people live happier and wealthier lives. District Lending brings this mission to life. We believe in integrity, honesty, and transparency, which is why you’ll see our rates right on our website. You’ll find lower rates and zero lending fees, which means you can buy your dream home for less. The savings are passed on to you — the way it should be.”

– Brian Reese, Advisor and Co-Owner, District Lending

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