Should You Get a Reverse Mortgage? The Pros and Cons

If you have a typical mortgage, you pay a lender on a monthly basis. The lender in a reverse mortgage, however, pays you. Reverse mortgages are often seen as very attractive sources of retirement income by many people. However, there are also disadvantages. Here is a summary of each.

Benefits of RM’s

With the help of a reverse mortgage, you are able to cash out on your house and start a new source of income that will help you live comfortably in retirement. With this kind of mortgage, you can borrow money against the equity in your house without losing ownership, meaning that even if you can’t make the loan payments, you won’t lose your house.

In actuality, you are not required to repay the loan until either you pass away or vacate your residence. This means that the loan will either be repaid with the money you leave behind or with the money you receive from the sale of your house. For retirees, this may make their debt feel much lighter.

Although there are income requirements and the income is tax-free, you must be at least 62 to be eligible.

Drawbacks of RM’s

Equity in your home decreases each time the bank pays you. If you need to obtain another type of loan based on the value of your home, this could have negative effects.

They may also be expensive. High fines and up front payments of up to 10% of your home’s value are sometimes required by banks.

The loan will be paid back by your heirs if you live in your house the rest of your life. This may be a disadvantage for senior citizens who are concerned about their estate and financial legacy to surviving family members. Your estate will never be required to make up more than the home’s appraised value, though.

A reverse mortgage is typically the most cost-effective choice if you intend to move within the next few years or only need to borrow a small sum. Some banks use pushy sales techniques to entice property owners into reverse mortgage arrangements that are not in their best interests. Before signing any documents, be sure to speak with a qualified independent financial advisor. You should also conduct some research to ensure you’re making the best decision.

Informational Bonus

HUD.gov: Seniors’ Home Equity Conversion Mortgages//portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/hecmhome

Reverse Mortgages FTC: http://www.consumer.ftc.gov/articles/0192-reverse-mortgages