Pros and Cons of a Reverse Mortgage
For many people, a reverse home mortgage is a good way to increase their income in retirement - positively affecting their quality of life. There are numerous advantages and some disadvantages to evaluate when considering a reverse mortgage.
Pros of a Reverse Mortgage
Financial Flexibility. The main advantage of reverse mortgages is their versatility as a financial planning tool with very few restrictions on how you receive and use the money.
To many people, a reverse mortgage simply sounds too good to be true. But, there really are no catches. Given the right set of circumstances, a reverse mortgage can be an ideal way to increase your spending power in retirement.
Other key advantages and benefits of reverse mortgages include:
- No Risk of Default if you comply with loan terms: With a reverse mortgage you will never owe more than your home's value at the time the loan is repaid, even if the reverse mortgage lenders have paid you more money than the value of the home. This is a particularly interesting advantage if you secure a reverse mortgage and then home price declines.
- Protection Against Foreclosure. Unlike a home equity loan, with a reverse home mortgage your home can not be taken from you for reasons of non-payment. If you default on a home equity loan, you could lose your home. The reverse mortgage lenders have no claim on your income or other assets.
- Tax Free: The money from a reverse mortgage is typically tax free, since it’s a loan when the homeowner receives the funds, as either additional fixed income or a lump sum.
- No Usage Restrictions: The money from a reverse mortgage can be used for any purpose- whether that's covering health care costs, funding leisure travel, paying for long-term care insurance, or assisting with family expenses like college tuition - anything goes.
- Flexible Payment Options: You can receive the reverse mortgage loan money in the form of a lump sum, annuity, credit line or some combination of the above.
- Easy Pre-Qualifications: There are limited income qualifications to get a reverse mortgage.
- Home Ownership: With a reverse mortgage, you retain home ownership and the ability to live in your home.
- Guaranteed Place to Live: You can live in your home for as long as you want when you secure a reverse mortgage.
- Federally Insured: The Home Equity Conversion Mortgages (HECM) is the most widely available reverse mortgage. It is managed by the Department of Housing and Urban Affairs (HUD) and is federally insured. This is important since even if your reverse mortgage lender defaults, you'll still receive your payments.
- Recently Increased Lending Limits: The lending limits for a reverse mortgage have increased significantly over the past few years.
Cons of a Reverse Mortgage
A reverse mortgage may not be for everyone, consider the following disadvantages of a reverse mortgage:
- Impact from Government Assistance: If you are currently or will be eligible to receive low-income assistance from the Federal or State government (like Medicaid), you will want to be careful that income from a reverse mortgage does not disqualify you from that assistance. (NOTE: Social Security and Medicare are not impacted by a reverse mortgage. Consult a professional for more information)
- Reconsider if You Are Planning to Move in the Near Term: Since a reverse home mortgage loan is due if your home is no longer your primary residence and the up front closing costs are typically higher than other loans, it is not a good tool for those than plan to move soon to another residence.
- Estate Inheritance: Many people dismiss a reverse mortgage as a retirement option because they want to be sure their home goes to their heirs. And it is true, a reverse mortgage decreases your home equity - affecting your estate. However, you can still leave your home to your heirs and they will have the option of keeping the home and refinancing or paying off the mortgage or selling the home if the home is worth more than the amount owed on it.
A reverse mortgage offers a unique solution for financial flexibility in retirement, particularly for those who wish to stay in their home and have substantial equity built up. It provides an opportunity to convert part of the equity in your home into cash without the burdens of monthly payments and with the assurance of never owing more than your home’s value. This financial tool can significantly enhance your retirement lifestyle by providing funds for various personal needs and desires.
However, it is important to understand the potential downside to a reverse mortgage. The impacts on estate planning and eligibility for certain government assistance programs must be carefully considered. By carefully weighing the advantages against the disadvantages, you can make a well-informed decision that maximizes your financial security and supports your retirement aspirations.
Ultimately, whether a reverse mortgage is suitable depends on individual circumstances and needs. Consulting with a financial advisor or a reverse mortgage counselor can provide tailored advice and help you navigate this decision, ensuring that it aligns with your long-term financial goals and retirement plans.
Reverse Mortgage Tools & Advice
