Is a Reverse Mortgage a Good Thing?
A reverse mortgage is a type of loan that allows homeowners who are at least 62 years old to borrow against their home equity and receive cash or a line of credit. Unlike a regular mortgage, they don’t have to make monthly payments until they move out, sell the house, or die. The loan balance grows over time, while the home equity decreases.
Reverse mortgages can be a good thing for some people, but they also have some drawbacks that should be considered before applying. Here are some of the pros and cons of reverse mortgages.
Pros of Reverse Mortgages
• More cash in retirement. Payments from a reverse mortgage can be useful if your retirement savings and Social Security checks just aren’t cutting it. If an extra source of income would help ease your budget worries or make your retirement more comfortable, a reverse mortgage could be worth it(businessinsider.com)(forbes.com)(cbsnews.com).
• No payments until you move, die, or sell the home. You don’t have to worry about paying back the loan as long as you live in the house and meet the ongoing requirements, such as paying property taxes, homeowners insurance, and any HOA fees(businessinsider.com)(forbes.com)(cbsnews.com).
• It can protect against loan costs exceeding the home’s value. If you get a federally insured Home Equity Conversion Mortgage (HECM), which is the most common type of reverse mortgage, you won’t owe more than the home is worth when the loan is due. The FHA insurance covers any shortfall between the loan balance and the home’s sale price(forbes.com)(cbsnews.com).
• You can liquify equity without selling the home. If you love your home and want to stay there as long as possible, a reverse mortgage can help you access some of its value without having to move or downsize(businessinsider.com)(cbsnews.com).
Cons of Reverse Mortgages
• They can be expensive and complicated. Reverse mortgages come with various fees and interest charges that can add up over time. You also have to pay for FHA insurance, which can be costly. The loan terms and conditions can be confusing and hard to compare with other options(businessinsider.com)(forbes.com)(cbsnews.com).
• They can reduce your home equity and inheritance. Every dollar you receive from a reverse mortgage reduces your home equity by the same amount, plus interest and fees. This means you will have less money to leave to your heirs or to use for other purposes if you decide to sell or move later(businessinsider.com)(forbes.com)(cbsnews.com).
• They can put your home at risk. If you fail to meet the ongoing requirements of a reverse mortgage, such as paying property taxes, homeowners insurance, and any HOA fees, you could default on the loan and face foreclosure. You also have to maintain the home in good condition and live there as your primary residence(businessinsider.com)(forbes.com)(cbsnews.com).
Conclusion
A reverse mortgage can be a good thing for some homeowners who need more cash in retirement and want to stay in their home. However, it also has some drawbacks that should be weighed carefully before applying. A reverse mortgage is not a one-size-fits-all solution, and it may not be the best option for everyone.
If you are considering a reverse mortgage, you should consult with a qualified financial planner and a HUD-approved HECM counselor who can help you understand the pros and cons of this type of loan and explore other alternatives.