Reverse Mortgage Pros and Cons
Do you know what your best financial options are? A reverse mortgage can be a great tool for seniors in the struggle for retirement planning, but as with everything else in life you need the right tool for the right situation. To know if a reverse mortgage is the right tool for you, read below to learn the pros and cons of reverse mortgages. Then compare and contrast a reverse mortgage against your other financial options, and know which path you should take. And remember, if you still have questions, a HUD-endorsed loan counselor will be happy to help you decide your best course of action.
ProsCons
Requirements for a reverse mortgage are significantly easier for seniors than alternative financing options. For example, refinancing has income requirements, credit reviews and monthly payments. The only qualifying requirements for a reverse mortgage are: the borrower(s) must be at least sixty two years old; own more equity in your home than you owe; use the mortgaged property as your primary residence, and be able to continue to afford insurance and maintenance costs of the property.
Reverse mortgages have higher origination fees than other loans. They also incur additional expenses in the form of taxes and insurance requirements. Many experts agree that refinancing or other types of loans are more cost effective than a reverse mortgage; however, for many seniors these alternatives require financial and credit requirements they cannot meet.
If you do not outright own your home and still have mortgage payments, successfully completing a reverse mortgage will resolve your current mortgage and relieve you of future payments. A reverse mortgage ensures that you keep your home for the remainder of your life, as long as you continue to live in the home and properly maintain it. Federal regulations protect your property from any claims as long as you continue to meet the conditions of the reverse mortgage.
A reverse mortgage converts your current equity to the cash payment(s) you receive, reducing your stake in the property. Depending on the value of the home and terms and length of the loan, this will reduce or completely deplete any compensation you could receive from a sale of the property or the inheritance you could leave to heirs. However, your home is federally insured and protected from ever owing more than the sale of your home even if the property value declines.
The obvious benefit of a reverse mortgage is the lump sum or monthly payments that can help you meet financial obligations from medical expenses to grocery bills. But a reverse mortgage also protects you from a declining economy, effectively locking the value of your home at its current appraised value; minus loan, insurance and tax fees. Because with a reverse mortgage you never make another payment for your home, and because you can never owe more than the sale price of your home, it is effectively selling your home for the price you receive for your reverse mortgage on the date you accept the loan. If your home appreciates in value beyond the debt of your loan, that money will be delivered to you or your heirs when the reverse mortgage is resolved.
One of the biggest cautions touted by financial experts and critics of reverse mortgages is that the borrower must continue to meet the requirements and obligations of the loan or risk losing their home. This includes keeping the home as your primary residence and not vacating it for longer than 364 days, which limits the time a person can spend in a hospital or nursing home. The borrower also needs to be able to continue maintaining the property and homeowners insurance, or risk the property being sold by the lender and the equity divided. Fortunately, there is the HECM for Purchase, a reverse mortgage designed for purchasing a new home, which allows the borrower to move homes if necessary (to be near family, to find a smaller easier-to-manage home, etc.)
A reverse mortgage is a long term commitment, and not a decision to be taken lightly. Be cautious of interested parties offering advice for or against a reverse mortgage: they may only be looking out for their own financial interests and not yours. The best thing you can do is get educated so you can make your own informed decision on what the best course of action would be. If you still have questions about reverse mortgages, please seek an appointment with a designated reverse mortgage counselor. A Trinity staff member would be happy to help you with this process as well, including helping you schedule your appointment with the HUD-desiginated loan counselor. Please call us immediately if you would like assistance.
