Reverse Mortgages Pros and Cons

There are both pros and cons of reverse mortgages. Reverse mortgages help many older Americans increase financial security and monthly cash flow to help pay for bills, medical expenses, and other daily living expenses.

What Is a Reverse Mortgage?

Qualified homeowners who are at least 62-years-old can convert their home equity into cash with a reverse mortgage. It is called a “reverse” mortgage because, unlike traditional mortgages where the homeowner pays the lender, the lender pays the borrower with a reverse mortgage.

The amount you can receive from a reverse mortgage depends on your age, the current amount of home equity, interest rates, and the value of your home. Borrowers must repay the reverse mortgage when the home is no longer their primary residence. This happens when the homeowner moves to another home, sells the home, or passes away. Let’s explore the pros and cons of reverse mortgages.

Advantages of Reverse Mortgages

Reverse mortgages are a great way for senior citizens to tap into their home equity to increase their standard of living. The money afforded from a reverse mortgage can help seniors enjoy their retirement and not be overly burdened by financial stress.

No Income Requirements: There are no income requirements for reverse mortgages. You should not, however, be significantly behind on your monthly mortgage payment.

Reverse Mortgages are not Taxable: You do not have to pay taxes on your reverse mortgage.

Additional Money: Reverse mortgage payments do not affect senior benefits, such as Social Security, Medicare, or Medicaid.

Several Ways to Receive: You can receive reverse mortgage payments in several ways. You can opt to receive the amount in a single lump sum, or perhaps you prefer monthly payments. Most reverse mortgage recipients choose to receive their payments as a line of credit, where the homeowner decides how much he or she receives at any given time.

Market Value Maximum: Reverse mortgages are based on the current market value of your home; the homeowner will never owe more on their reverse mortgage than their home’s market value.

Reverse Mortgage Disadvantages

You have read the pros of reverse mortgages, now let’s explore the cons. Below are reverse mortgage pitfalls that homeowner's should be aware of.

Higher Interest Rates: Reverse mortgages have higher interest rates than traditional home loans.

Up-Front Costs: Like many conventional loans, reverse mortgages include several up-front fees, including appraisal fees and origination fees.

Last-Minute Results: Borrowers cannot lock their rate until the last minute, at the time of closing. This means that homeowners will not know how much their reverse mortgage is worth until it’s time to sign the papers.

Home Condition: If your home requires serious repairs, such as roof or foundation repairs, you may not qualify for a reverse mortgage until a licensed contractor makes the repairs. 

Reverse Mortgage Scams

As reverse mortgages gain in popularity, so do reverse mortgage scams. To avoid fraudulent lenders, be sure to work with a mortgage company that is respected and trustworthy, and never divulge personal information until you are certain of the lender’s reputation. Also never pay money for reverse mortgage counseling or to simply have your questions answered.

To learn about more reverse mortgages pros and cons, contact your financial advisor or mortgage lender today.