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HECM reverse mortgage.
HECM Cons – What are the Advantages and Disadvantages of HECM loan.
Advantages and Disadvantages of Reverse Mortgage
In some ways, a reverse mortgage sounds too good to be true. You get to receive a large sum of money, tax free, and defer your mortgage payments so you can enjoy a better quality of life than you would have otherwise been able. It is true – there is a lot to like about taking out a reverse mortgage on your home. However, there are some disadvantages to using this financial planning tool as well. Before you take out a reverse mortgage on your home, it is important you weigh all of the pros and cons and make an informed decision about what is best for you and your family.
Let’s consider some of the more prominent advantages and disadvantages of a reverse mortgage.
Advantage – Tax Free Money
Let’s be honest, there aren’t very many times in life when you have a shot at tax free money. It seems that no matter where you get your money from, the government has a way of always getting its share. In the case of a reverse mortgage, however, that isn’t necessarily true. Most reverse mortgage income is tax free because it is classified as a loan. That means that you can receive every penny of the loan – either in a lump sum or as fixed income – and not lose a percentage of it to the government. This is an important point to think about while deciding on whether or not to take a reverse mortgage on your home. There is no adjustment needed to the amount of money you will get, because Uncle Sam is going to keep his hands off of it.
Disadvantage – Possibly Affect Low-Income Assistance
May programs that are in place for seniors – things like Medicaid and other state programs – are based on your income level. If you currently qualify for low-income assistance, you might lose that qualification if you receive a large sum of money from a reverse mortgage. However, this only applies to programs that are offered exclusively to low-income individuals. Something like Social Security would not be affected since it is offered to all citizens with a working history. This issue should not prevent you from considering a reverse mortgage, it is simply something to consider as part of the bigger picture.
Advantage – Restriction Free
Many loans come with a tight set of restrictions as to what can be done with the money. For example, a car loan can only be used for the purchase of a car specifically. However, the money you receive from a reverse mortgage is simply yours to do with as you wish. Often it is used as an additional revenue for people to live the lives they have dreamed of living. Vacations, recreational activities, and more can all be paid for with the extra money you will have in the back from your reverse mortgage. Rather than tying up all of your money in a monthly mortgage payment during your golden years, why not free it up and enjoy life? You have worked a long time to get to this point, and you should be free to enjoy it to the fullest.
Disadvantage – Limited Ability to Move
If you aren’t sure that you will be living in your home for the long term, a reverse mortgage might not be the best choice for your situation. The balance of a reverse mortgage is due when you no longer call the home your primary residence, so you could be forced to stay in your home for financial reasons. The reverse mortgage is designed for those who intend on living throughout their retirement years in the same home and want more money free during those years. If you have plans to move, or could see a scenario in which you might need to move, think carefully before signing up for a reverse mortgage. You don’t want to end up stuck in a home that doesn’t work for you in the long term. If you are going to be moving within the next few years, it would be wise to wait on looking at a reverse mortgage. You could always consider taking one out on your next home once you are settled in for the long run.
Advantage – Federally Protected
Since the most popular of all reverse mortgages, the Home Equity Conversion Mortgage (or HECM) is managed and backed by the federal government, you don’t have to be concerned about your lender defaulting. This is a great assurance in the uncertain financial times that we live in. You want to know that your payments will be received and the terms of the loan will be honored. Thanks to the involvement of the federal government in this program, you can rest easy knowing the reverse mortgage will play out exactly as expected.
Disadvantage – Reduction in Your Estate for Your Heirs
If you are concerned with leaving as much as possible to your heirs when you pass on, the reverse mortgage can eat into your estate value. When the owners of the home have died, the reverse mortgage becomes due and the estate is responsible for settling that debt. Most often, the home is sold and that money is used to satisfy the outstanding balance on the mortgage. If there is any additional money from the sale of the home not needed to pay off the mortgage, it would be added to the value of the estate. As an alternative, your heirs could choose to refinance the home in order to pay off the reverse mortgage and keep the home under the new loan.
You are basically living off of the equity of the home when you take a reverse mortgage. You will have to consider whether or not you want to use that money while you are alive to improve your quality of life, or have less money available for yourself in order to leave more to your heirs. That is a personal decision, to which there is no right or wrong answer. Think hard about what is most important to you and what will be in the best interest of your family.
Advantage – Easy Pre-Qualification Process
If you have purchased a home in the past, you know how difficult the traditional mortgage process can be. There is tons of paperwork, credit checks, and various other factors that determine what kind of loan you can qualify for. With a reverse mortgage, the process is much easier on you. There is no income qualification required to take out a reverse mortgage, so your personal finances will not be cross-examined as they are when taking out a normal loan.
Bonus Advantage – No Risk of Foreclosure
When you use a traditional mortgage to finance a home, you must make your payments on time each and every month. If you fall behind in those payments, you can face penalties from the bank and even lose the house altogether. When you have a reverse mortgage that is simply not a possibility because you are not making monthly payments on the loan. If you run into a difficult financial period in your life, you won’t have to worry about keeping up on the mortgage payment in order to keep the house. Your financial stress will be significantly reduced using this financial planning tool, and you will be free to enjoy the retirement you worked so hard to achieve.
While there is a lot to like about taking out a reverse mortgage, they are not for everybody. If some of the disadvantages might apply to your specific case, you would be wise to think twice before looking at a reverse mortgage. It still may be a viable option for you, but it is important to know as much as you can before making a decision. For most people, those negative factors will not relate to their situation and the decision to take out a reverse mortgage will become a fairly easy one.