There’s no doubt that the decision to get a reverse mortgage can be a big one, especially depending on the borrower’s particular financial situation. Maybe you’ve decided that additional cash flow will help to stabilize your retirement finances, or maybe you’re looking to fund something like in-home care or a renovation to make your house more accessible.
Whatever your potential reason is for getting a reverse mortgage, you likely won’t find an industry that is more upfront about what the potential benefits can be in tandem with possible downsides to the product category. Any reverse mortgage professional worth his or her salt will be very open about the fact that it is not a product category that can work well for everyone, but for those who it can work for, it’s best to have all the information you can get ahead of time.
This article will lay out for you all of the major pros and cons that come with a reverse mortgage loan including ways in which the proceeds from the loan can be used, the potential drawbacks of using one, and how taking one out can affect the people around you.
In this article you will learn:
- Reverse mortgage pros
- How a reverse mortgage can stabilize your retirement
- How an existing mortgage can be paid off
- Why you’ll be able to remain in your home
- How you’re protected from going “underwater”
- Reverse mortgage cons
- The upfront cost
- How your heirs could inherit less
- The possibility of foreclosure
- Reverse mortgage complexity
The pros of a reverse mortgage
If you’re finding that your retirement finances are becoming difficult to manage or to build, then a reverse mortgage loan could allow you to stabilize your retirement finances. This is because the major function of a reverse mortgage is that it allows borrowers to access the equity they’ve built up in their home, turning it into spendable cash with several different disbursement options. These can include an upfront lump-sum payment, regular monthly checks or a standby line of credit that can be used whenever a borrower needs it.
If you already have an existing, forward mortgage, you may find it beneficial that a reverse mortgage will pay off any existing remaining mortgage balance first, effectively ending your existing mortgage and eliminating that often-costly monthly payment, particularly for someone who lives on a fixed income. Indeed, an existing mortgage must be paid off first before you can access any additional proceeds, since it is required that the reverse mortgage loan be in the “first lien” position.
Still, a reverse mortgage is unique in the sense that you are allowed – and indeed, required – to remain in your home as a borrower. Many seniors who have spent sizable portions of their lives in their home understandably find the idea of leaving that home to live in specialized senior housing or assisted living facilities stressful, and if you are looking to access your home’s equity without moving out of the house, then a reverse mortgage might be the right loan for you.
Most reverse mortgages are insured by the Federal Housing Administration (FHA), a division of the U.S. Department of Housing and Urban Development. One of the benefits of being sponsored by the federal government is that each reverse mortgage loan carries borrower protections and guarantees, such as the stipulation that a borrower can never owe more on the reverse mortgage than the home was worth at the time of sale. This protects you as the borrower and your heirs from having to repay a loan balance that exceeds the value of the home sale proceeds.
The cons of a reverse mortgage
While there are many reverse mortgage benefits, there are some key components of a reverse mortgage that may not make it the best fit for your situation. For instance, some borrowers may view the closing cost of a reverse mortgage as prohibitively expensive, because the upfront reverse mortgage insurance premium, paid to the Federal Housing Administration (FHA), typically comes in at 2% of the home’s value. On a home with an appraised value of $500,000, for instance, this could add upwards of $10,000 to the upfront cost of getting the loan.
A reverse mortgage is also still a mortgage, meaning that it is a debt-based lending instrument. Since you are borrowing against the equity you’ve built up in your home, then at the point you leave it – either after you pass away, or if you decide to move out – the loan balance must be paid back. This could mean your heirs stand to inherit less than they would if you did not have the reverse mortgage, since the loan is most often repaid by using proceeds from the sale of the home. If your heirs wish to keep the home, they may repay the loan through other means they have available.
Since it is a mortgage, there is still the possibility of being foreclosed upon if you do not meet the terms of keeping the loan in good standing. For a reverse mortgage, this means maintaining your property tax and insurance payments, as well as any associated homeowners’ insurance and homeowner’s association (HOA) fees that may apply. The home must also be maintained to FHA standards, including keeping the home in good repair.
Finally, reverse mortgages can be complicated and have some disadvantages. Like with other financial products, there is a lot of information to learn and keep track of, which may turn some seniors off the idea behind getting such a loan. In that event, the best thing you can do if still considering getting one is to ask as many questions from professionals as possible, and to make sure your family and any other people potentially affected by the transaction are fully aware of what you intend to do. Arm yourself with good information so that if you do decide to avail yourself of the potential benefits, you know exactly what you’re getting into and what you need to do to keep the loan in good standing.