A reverse mortgage loan, when used correctly can add stability to your retirement years. But as with any financial product, it’s not the right program for everyone. We created this Pros and Cons guide to help you make an informed decision about reverse mortgages.
Reverse Mortgage PROS
1. No Monthly Mortgage Payments
A reverse mortgage allows eligible borrowers to live for life in their home with no monthly mortgage payments. The loan balance is repaid when you permanently vacate the home (when you sell the home or if you leave the home for care including for 12 months or more). You do not have to make monthly payments with a reverse mortgage, so qualifying for the loan is not the same or as difficult as for a forward mortgage.
Not nearly as much income is needed to qualify for a reverse mortgage. Remember, you and the lender still want to be sure you can comfortably afford your home.
2. Use Funds for Virtually Anything
Take your funds in a single lump sum payment, flexible line of credit, or monthly payments for term or life. Reverse mortgage proceeds are loan funds and therefore, are treated like any other loans and not considered income (check with your tax advisor) and you can use the money for any purpose whatsoever. It’s your home, your money and your choice!
3. Guaranteed Line of Credit
As long as you have funds left on your line of credit and you meet your obligations, HUD insures your funds are available. Banks have been known to freeze or eliminate HELOC lines of credit without advance notice in the past. It is comforting to know this cannot happen with the reverse mortgage line of credit.
No matter how long you live in your home, no matter how many payments you take or what happens to the real estate values, you and your heirs can never owe more than the property is worth.
4. Home Purchase Feature
You can use a reverse mortgage to not only refinance your existing mortgage, but also to purchase a new home.
This works extremely well for people in three scenarios:
- Those who want to buy a home
- Those who need to get a home that will better suit their needs
- Those who need to lower their expenses
In the past, seniors purchasing homes were often forced to pay cash for a new home due to their income scenario. Borrowers who did not have the ability to pay cash or did not have or want to use all cash from the sale of their existing home just to purchase the next home, can now buy their new home using the reverse mortgage as the down payment without ever having to make a mortgage payment.
This loan works great for seniors seeking homes they may not have been able to consider otherwise. New homes in 55+ developments where prices might have kept them from the home of their dreams if they had to pay 100% cash are now attainable.
Those who need to move to be closer to support systems can do so with a reverse mortgage. A move might have been out if a new mortgage with a payment would have been the result where a reverse mortgage may allow seniors to move to cities closer to needed services, family or friends.
Reverse Mortgage CONS
1. Reverse Mortgages have Higher Closing Costs vs Traditional Loans
In this case, let’s start with the downsides. Reverse mortgages can be expensive loans. With the government insured reverse mortgage (HUD HECM) borrowers have both upfront and annual renewal mortgage insurance premiums (MIP) to pay.
Even though not paid out of pocket, the costs can be substantial. The insurance insure borrowers and lenders against the risk of default but also ensures that borrowers and their heirs will never have to repay the loan for more than the property is worth, regardless of how high the balance increases or if future property values fall.
Borrowers with homes worth more than the HUD maximum Lending Limit of $726,650 receive no additional benefit for any additional value above that lending limit. Therefore, those owning these higher priced homes may prefer a private or proprietary reverse mortgage. These loans are called jumbo reverse mortgages due to them being used primarily for higher valued properties. Because these loans are not government insured, require no mortgage insurance, but the interest rates are higher.
2. May Impact Needs Based Programs
Another possible drawback to a 62 or older borrower with a reverse mortgage is if they draw from their loan and then allow their liquid balances to be too high to quality for needs-based programs such as Medicaid.
(Note: Regular Social Security and Medicare are not affected by taking a reverse mortgage.)
3. Bad Actors
Trusting seniors are targets and those with cash available are targets for people for bad investments, family with failing businesses, unscrupulous caretakers and others looking to take advantage. Too often when we see reverse mortgage funds lost, it was not the reverse mortgage that failed but the way the money was spent/invested.
4. Spousal Protection
Fortunately, HUD changed its guidelines and unlike loans closed prior to 2015, spouses of reverse mortgage borrowers who are under 62 years of age at the time the loan closes are now protected as an “eligible non-borrowing spouse”. They too can live in the home for life as well. They must also maintain the home in a reasonable manner, pay the property taxes and insurance on time and live in the home as their primary residence.
Borrowers and spouses do have to remember that eligible non-borrowing spouses are not borrowers on the loan and as such, they do not have access to any line of credit funds that may still be available after the eligible borrower passes.