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Advantages and Disadvantages of a Reverse Mortgage
A Guide to Reverse Mortgage Pitfalls and Benefits
For many people, a reverse home mortgage is a good way to increase their income in retirement - positively affecting their quality of life.
Advantages of a Reverse Mortgage
The main advantage of reverse mortgages is that they are an extremely flexible financial planning product with very few - if any - restrictions on how you receive and use the money.
To many people, a reverse mortgage simply sounds too good to be true. But, there really are no catches - given the right set of circumstances, a reverse mortgage is an ideal way to increase your spending power in retirement.
Key advantages and benefits of reverse mortgages include:
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No Risk of Default:
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Unlike a home equity loan, with a reverse home mortgage your home can not be taken from you. If you default on a home equity loan, you could lose your home.
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The Reverse Mortgage Lenders have no claim on your income or other assets.
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No Downside: You will never owe more than your home's value at the time the loan is repaid, even if the reverse mortgage lenders have paid you more money than the value of the home.
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Tax Free: The money is typically tax free, since it’s a loan when the homeowner receives the funds, as either additional fixed income or a lump sum.
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No Restrictions: How you use the funds received is not restricted - go traveling, get a hearing aid, purchase long term care insurance, pay for your children’s college education - anything goes.
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Flexible Payment Options: You can receive the loan money in the form of a lump sum, annuity, credit line or some combination of the above.
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Easy Pre-qualifications: There are no income qualifications
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Home Ownership: You retain home ownership and the ability to live in your home
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Guaranteed Place to Live: You can live in your home for as long as you want
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Federally Insured: Some reverse home mortgages are federally insured - these are known as HUD's HECM FHA insured Home Equity Conversion Mortgages (HECM) reverse mortgages. With these, even if the reverse mortgage lenders default, you'll still receive your payments.
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No Maximum Loan Amount: For Seniors with a large amount of home equity, private reverse mortgage lenders offer products with no maximum loan amounts.
Disadvantages of a Reverse Mortgage
A reverse mortgage may not be for everyone, consider the following:
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Beware if You are Eligible for Low-Income Assistance: If you are currently or will be eligible to receive low-income assistance from the Federal or State government (like Medicaid), you will want to be careful that income from a reverse mortgage does not disqualify you from that assistance. (NOTE: Social Security and Medicare are not impacted by a Reverse Mortgage.)
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Reconsider if You Are Planning to Move in the Near Term: Since a reverse home mortgage loan is due if your home is no longer your primary residence and the up front closing costs are typically higher than other loans, it is not a good tool for those than plan to move soon to another residence.
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Evaluate if You are Willing to Reduce Your Heirs Inheritance: Many people dismiss a reverse mortgage as a retirement option because they want to be sure their home goes to their heirs. And it is true, a Reverse Mortgage decreases your home equity - affecting your estate. However, you can still leave your home to your heirs and they will have the option of keeping the home and refinancing or paying off the mortgage or selling the home if the home is worth more than the amount owed on it. There are numerous potential Estate and Retirement Planning benefits to a Reverse Mortgage - see Innovative Uses of a Reverse Mortgage for more information on these options.
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