Reverse mortgages: the pros and cons explained
Are you looking for ways to increase your cash flow in retirement?
If you own your home (or most of it), a reverse mortgage can help. It can eliminate your current mortgage payment and generate a steady stream of income. However, some factors may deter you.
That’s why it pays to have a good understanding of how reverse mortgages work. Experts are here to help and can help you get started with a reverse mortgage today.
Here’s a closer look at reverse mortgages, the pros and cons, and when it might be a good idea.
What is needed for a reverse mortgage?
Most reverse mortgages are home equity conversion mortgages (HECMs) backed by the Federal Housing Administration (FHA) and issued by FHA-approved lenders. To qualify, you will need to meet a few requirements, including:
- Age: You must be at least 62 years old.
- Ownership: Your name must appear on the title of the house.
- Equity: Equity requirements may vary by lender — often at least 50% ownership is required.
- Property type: Your property must be a single family home, condo, manufactured home, or owner-occupied multi-unit property (up to four units) approved by the Department of Housing and Urban Development (HUD).
- Occupation: You must live in the accommodation as your main residence (more than six months of the year).
- Tips: You must follow the advice of a HUD-approved reverse mortgage counselor.
How is a reverse mortgage repaid?
Unlike traditional mortgages, reverse mortgages do not have regular payments. The full outstanding balance is due when certain events occur, including if you:
- Sell your house
- Transfer title to someone else
- Move permanently
- Default on loan terms
In most cases, reverse mortgages are paid off by selling the home or returning title to the lender. However, the balance can also be refinanced or repaid by other means (eg savings, inheritance, etc.).
What can a reverse mortgage be used for?
You can use the funds you receive from a reverse mortgage for anything, such as buying groceries, making improvements to your home, or paying bills. Retirees typically use them to supplement their Social Security and other retirement income.
If you could use the extra money that a reverse mortgage frees up, it’s worth exploring your options. Reverse mortgage experts are available today to help you get started.
How much does a reverse mortgage application cost?
Most lenders won’t charge you for applying for a reverse mortgage. However, be prepared to pay for your mandatory consultation session and home appraisal. Also, if you are approved and decide to go ahead, you will have to pay closing costs and assembly fees, service fees, etc.
How much can you borrow with a reverse mortgage?
The amount you can borrow, also known as your net principal amount, is based on your age, home value, interest rate and borrower costs. When you apply, your lender will calculate it for you.
Advantages and disadvantages of reverse mortgage
Although a reverse mortgage can offer various advantages, it also has some potential disadvantages. Here is a summary of the pros and cons.
- Can provide tax-free cash flow in retirement
- Can eliminate your monthly mortgage payment
- You won’t have payments until you move, sell, die or default
- Several disbursement options are available (loan, line of credit, monthly payments)
- The loan balance cannot exceed the value of your property, so you won’t get underwater
- Must be at least 62 years old to qualify
- May affect eligibility for certain government benefits (Medicaid and Supplemental Security Income)
- Failure to pay may result in foreclosure
- You cannot move without the balance being due
- Fees and closing costs apply
- You must own a home and have sufficient equity to qualify
- The heirs will not inherit your house frankly
Is a reverse mortgage right for you?
Whether or not a reverse mortgage is right for you will depend on a few factors. First, consider how long you plan to stay in the house. If you don’t plan to move, a reverse mortgage may be right for you. However, if you wish to move in the future, your outstanding balance will become due, which may require you to sell the home.
Also, if you want to pass your home on to an heir, a reverse mortgage will make that more difficult. They will have to repay or refinance the outstanding balance of the loan at the time of your death. Other critical factors to consider are the costs of getting the reverse mortgage and whether the loan will impact your government benefits.
While a useful lending product in certain situations, reverse mortgages are specific to the homeowner’s personal financial situation and preferences. Be sure to weigh the pros and cons carefully and raise any concerns during your mandatory counseling session.
Ready to get started and get the money out of your house? Find out what you can claim by taking action today.