A reverse mortgage, also known as a Home Equity Conversion Mortgage (HECM), can stabilize your retirement years when used properly. However, it is not always the best program for everyone, just like with any financial product.
To assist you in making an informed decision about reverse mortgages and to help you determine whether this program is appropriate for your long-term retirement goals, we published this pros and cons guide.
- Helps Secure Your Retirement. …
- You Can Stay in Your Home. …
- You’ll Pay Off Your Existing Home Loan. …
- You Won’t Have Tax Liability. …
- You’re Protected If the Balance Exceeds Your Home’s Value. …
- You Could Lose Your Home to Foreclosure. …
- Your Heirs Could Inherit Less. …
- It’s Not Free.
Reverse Mortgage Downsides
Due to financed origination fees up front, reverse mortgages can be pricey loans. Using the HUD HECM reverse mortgage, which is government-insured, borrowers can pay 2% upfront and 50% annual renewal mortgage insurance premiums (MIP) to pay.
Even though they are not paid out of pocket, the costs can be a significant drawback for homeowners who are concerned about closing costs. Borrowers frequently have access to lender credits to cover all or a significant portion of their costs, but this is not always the case. Always shop around to find the best offer that is currently available.
The insurance protects both lenders and borrowers from the risk of default but also guarantees that, regardless of how much the loan balance rises or if future property values decline, borrowers and their heirs will never be required to repay the loan for an amount greater than the value of the property.
Borrowers whose homes are valued at more than the $1,089,300 HUD maximum lending limit do not receive any additional benefits for any value above that lending cap. Loan amounts are calculated as a proportion of the appraised value or the HUD lending limit, whichever is less; therefore, values above the HUD program’s maximum lending limit do not provide borrowers with any additional funds.
As a result, owners of these more expensive homes might prefer a private or proprietary reverse mortgage. Because they are used primarily for properties with higher values, these loans are known as jumbo reverse mortgages. These loans do not require mortgage insurance because they are not government-insured, but the interest rates are higher.
# May impact needs based programs
If a reverse mortgage borrower is 62 or older and relies on needs-based programs like Medical Assistance, the accumulation of funds in their account could be another disadvantage. Although the proceeds of a reverse mortgage are not considered income, borrowers may lose their eligibility if they withdraw money and let it build up in their checking or savings accounts.
When borrowers must provide statements to various entities by month’s end in order to continue receiving benefits, special care must be taken to ensure that they only withdraw money as needed and that it has been deducted from their accounts.
(Note: Taking out a reverse mortgage has no impact on regular Social Security or Medicare. ).
# Bad actors
Trusting seniors are targets for those looking to take advantage of them, including those looking to make bad investments, families with failing businesses, dishonest caregivers, and others. Too frequently, when reverse mortgage funds are lost, it was the way the money was invested or spent, not the reverse mortgage, that failed.
# Older versions lacked spousal protection
Thanks to a change in HUD policy, spouses of reverse mortgage borrowers who are younger than 62 at the time the loan closes are now protected as “eligible non-borrowing spouses,” unlike loans closed before 2015. They must also keep up with reasonable home maintenance, timely pay property taxes and insurance, and occupy the house as their primary residence.
It is important for borrowers and their spouses to remember that eligible spouses who are not borrowers on the loan do not have access to any line of credit funds that may remain after the eligible borrower passes away. It’s also crucial to remember that non-borrowing spouses are safeguarded in the event of the borrowing spouse’s passing.
Borrowers should take this into account when making plans and decisions regarding a reverse mortgage with a spouse who is not yet 62 years of age because the loan may still be called due and payable if the borrowing spouse should leave the house for any other reason.
Now for the Pros!
A reverse mortgage enables qualified borrowers to remain in their home without making monthly mortgage payments for the rest of their lives. Compared to a conventional forward loan, a reverse mortgage has significantly lower income requirements. Keep in mind that both you and the lender want to be certain you can afford future property expenses like taxes and insurance.
# You can use funds for virtually anything
Take your money in a lump sum, a flexible line of credit, monthly payments for a term or a lifetime, or a combination of these options (i e. , a line of credit that can be used for home improvements but also carries a lifetime payment) Reverse mortgage proceeds are treated like any other loan proceeds and are not regarded as income (consult your tax advisor). You are free to use the funds however you see fit.
Use ARLO’s reverse mortgage calculator to determine your eligibility and learn about your HECM loan options.
# Guaranteed line of credit for life
HUD guarantees that your funds are always accessible as long as there are funds on your line of credit and that you fulfill your obligations.
In the past, banks have been known to abruptly freeze or terminate HELOC lines of credit. They also reach the end of the “draw period,” when you enter the repayment phase and funds are no longer available. During this phase, payments can increase by two or three times, even though your income may not be as high as it was when you first received the loan.
It is consoling to know that the reverse mortgage line of credit prevents this from happening. You and your heirs will never be required to pay back more than the property’s value to pay off the loan in full, regardless of how long you live in your home, how many payments you make, or what happens to real estate values.
# Ability to purchase a new home
A reverse mortgage can be used to buy a new house in addition to refinancing your current one.
This works extremely well for those who:
In the past, seniors buying homes were frequently required to pay cash due to their income situation. Borrowers who previously couldn’t afford it, didn’t have it, or preferred to use the entire proceeds from the sale of their previous residence can now purchase a new home using a reverse mortgage without ever having to make a monthly mortgage payment.
Seniors looking for homes who might not otherwise have been able to do so benefit greatly from this loan. They can now afford new homes in 55+ communities where the cost might have prevented them from buying the home of their dreams if they had to pay 100% cash.
A reverse mortgage enables a move that might not have been possible with a conventional loan, such as for people who need to be nearer to support networks like essential services, family, and friends.
Reverse Traditional HELOC Allows No Monthly Payments Line of Credit Growth? (Available funds in the Line of Credit grow in availability over time) Reverse Mortgage vs. Traditional Loans Limited credit requirements, limited income requirements, and flexible proceeds (monthly payments, a line of credit, a lump sum, etc.) Investment properties (Helocs and reverse mortgages must be used for primary residence only) (Reverse mortgages are not assumable by a family member and are due upon the passing or permanent relocation of the last surviving borrower or eligible non-borrowing spouse.) Low Closing Cost Options ).
It’s important when planning to think long term. Retirement is tricky and people are living longer. In the event that you opt for a reverse mortgage now and later decide to move, your equity may not be as readily available for your subsequent purchase.
The reverse mortgage can assist in funding a more secure retirement if your current home is fully accessible and you can stay there for the foreseeable future. Reverse mortgages have proven to be very beneficial for those who needed and wanted them.
However, you are the only one who can decide if this loan is the best choice for you, along with the help of your family and a trusted financial advisor.
America’s #1 Rated Reverse Lender Celebrating 17 Years of Excellence.
What is the downside of getting a reverse mortgage?
The loss of home equity is one of reverse mortgages’ major drawbacks. You’ll make less money when you sell the property or have less borrowing power if you need a new loan because you’re not reducing the balance of your reverse mortgage. You’ll pay high upfront fees.
Why do people dislike reverse mortgages?
Because reverse mortgages are negatively amortized loans, which means that the loan balance increases over time, some people might not like them. This differs from a traditional mortgage, which has a decreasing loan balance as borrowers make monthly payments.
What does AARP think of reverse mortgages?
AARP makes neither recommendations in favor of nor against reverse mortgages. However, they do urge borrowers to invest in their education so that they can make the best decisions for their particular situation.
What does Suze Orman say about reverse mortgages?
There is no one size fits all solution. Although a reverse mortgage won’t be everyone’s best option, it shouldn’t be disregarded as a component of their overall retirement strategy.