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Pros Cons Advantages Disadvantages Benefits Negatives Risks Pitfalls Reverse Mortgages

Pros Cons | Advantages Disadvantages | Benefits Negatives | Risks Pitfalls of HECM reverse mortgage loans for seniors.

Pros and Cons of Reverse Mortgages

With an increasing number of Americans in desperate need of a cash stimulus, there has been a corresponding rise in the number of homeowners seeking reverse mortgages. Reverse mortgages are intended for seniors (62 and older) who are in need of cash and therefore willing to tap into the equity of their home. As opposed to a traditional mortgage in which the homeowner makes cash payments in exchange for equity of their home, in a reverse mortgage this payment system is reversed. For many retirees, reverse mortgages pose several distinct benefits, though it’s critical that homeowners are aware of the potential cons before reaching a decision.

Pros of Reverse Mortgages | Benefits | Reasons to take a reverse mortgage loan

Cash Flexibility:
With reverse mortgages, homeowners can choose for themselves how they receive their cash to best suit their needs. For some homeowners, a lump sum may be optimal while others may opt for a set monthly payment. Whatever the specific circumstances may be, this flexibility is a significant benefit for all homeowners.

Keep Your Government Benefits:
Seniors don’t have to worry about a reverse mortgage having a negative effect on the benefits they receive through Social Security or Medicare. This means that for many Americans reverse mortgages are an ideal way of getting their hands on cash without suffering almost any unintended consequences vis-à-vis government benefits.

Never Owe More Than Your Home:
With traditional mortgages, it’s possible that homeowners will end up owing more than the total value of their home. However, with reverse mortgages there is no need to be concerned about such a reality, since the FTC ensures that no reverse mortgage will ever leave a homeowner owing more than the worth of their home.

Tax Free Income:
Reverse mortgages are typically not taxed, which means that this is a useful method of gaining income in which you will receive 100% of the principal.

Minimal Requirements:
As opposed to traditional loans that are dependent on income requirements and credit history, homeowners will have a much easier time securing a reverse mortgage. There are far fewer bureaucratic loops to get through, and homeowners will be able to keep the title of their home.

No Payments Due:
Homeowners don’t have to make a payment on their reverse mortgage until he/she passes away, is no longer living in the home, or until the house is sold. This offers homeowners a tremendous amount of breathing room which is a major benefit for many retirees struggling financially.

Cons of Reverse Mortgages | Disadvantages | Pitfalls | Risks | Avoid a HECM loan

Medicaid Eligibility:
While many government benefits are unaffected by reverse mortgages, homeowners should be aware that the cash they receive from a reverse mortgage can make them illegible for Medicaid, especially when the homeowner decides to receive a large lump sum. 

Limited to Seniors:
In order to be eligible for a reverse mortgage, the homeowner must be 62 years old. While there are certainly younger homeowners who could benefit from a reverse mortgage, they are unable to qualify for such a loan. 

Expensive Fees:
A reverse mortgage might sound too good to be true, and sometimes there are hidden costs. For example, once you read the small print you’ll become aware that lenders often charge a whole host of fees before the cash is delivered. These fees can end up costing homeowners a significant amount of money, and so the details of a reverse mortgage must be checked meticulously before signing a contract.

Not Tax Deductible:
Until the initial loan is repaid, the interest on the loan is not tax deductible. This is in contrast to traditional mortgages where homeowners can receive a tax deduction from the interest that is paid off.

Interest Rates:
Take a close look at the interest rate of a reverse mortgage before signing a deal, and keep in mind that the principal will increase over time. While it’s true that with a reverse mortgage you’ll never owe more than the total value of your home, you may find yourself owing an uncomfortably large amount of money due to a high interest rate.

Loss of Equity:
Many aging Americans would like to leave their home as an inheritance to their children, but with reverse mortgages you’ll be signing away part of the equity of your home. While the initial cash stimulus might be helpful, the negative long-term effects are enough to keep many Americans away from signing a reverse mortgage. 

Summary

Reverse mortgages offer seniors access to cash with unique benefits, and so it’s understandable that they appeal to many thousands of homeowners. The ability to receive tax-free income while maintaining the title to your home and keeping almost all of your government benefits is a tempting deal for many retirees without a steady income. However, seniors need to be aware that there are also downsides to reverse mortgages, and that high interest rates and expensive fees might come back to hurt them. As with all loans, consumers should perform comprehensive research to learn about all of the options available to them before making a rash financial decision.