The Pros And Cons of Reverse Mortgages

If you are someone who owns a home or planning for retirement, then you have probably heard of reverse mortgages. When you first hear about this type of loan, it sounds like a no-brainer, especially if you’re someone who invests in properties, or your net worth is highly reliant on your house. However, don’t get too excited because there are some downsides of reverse mortgages too.

Before you make a decision to apply for this loan, make sure you understand all the pros and cons of reverse mortgages, to begin with.

Reverse mortgages are basically mortgage loans that allow homeowners starting from the age of 62 to access a portion of their home equity without having to pay for regular mortgage payments. This type of loan is more popular in areas where the population is older, and that is why reverse mortgages are popular in Arizona–because many of the baby boomer generations are not old enough to get a reverse mortgage.

The idea revolves around borrowing against your equity in the house in return for cash. Though, it doesn’t work like regular mortgage loans. You are paid for equity in the property and will repay when you sell the property. This type of reverse mortgage loan is referred to as a home equity conversion mortgage (HECM).

A reverse mortgage works like a regular mortgage, but, in reverse. When you take out a regular mortgage, you get a specific amount that you have to pay back over a period of time, until the amount is paid back to zero. A reverse mortgage, on the other hand, is when a lender makes the payments to you. The amount you owe becomes more over time, the more your house equity decreases.

And of course, you still keep the house, unless you die or decide to move to another one. When that time comes, the cash from selling the house is used to pay off the debt. If there’s equity left, it goes to the state. If it is the other way around–the loan is worth more than the house, then your heirs don’t have to pay the difference. The only case in which heirs have to pay is if they choose to keep the property. Hence, they will pay off the reverse mortgage.

The Pros:

1. Is a great option when putting together a retirement plan

Taking out a reverse mortgage is a great option if you are someone planning for their retirement and don’t have much savings or investments, but their net income is in their home. It allows you to get cash without liquidating the asset to have some money while you retire.

2. Can be used to pay off regular mortgage loans

To apply for a reverse mortgage you don’t have to have your home completely paid off. If you make the calculations, you can use the money from the reverse mortgage to pay off your current regular mortgage loans, and even have excess proceeds.

The proceeds you get for a reverse mortgage are not taxable because they are considered a loan, and are treated the same way, therefore they are not considered income, according to IRS.

3. Your heirs don’t have to pay the difference

In the case that the reverse mortgage amount exceeds the equity of your home, which could happen for several reasons like prices falling, for instance, your heirs don’t have to pay the difference.

The Cons:

1. You have to pay a fee

Of course, a reverse mortgage doesn’t come for free. As they say, if it’s too good to be true, then there’s probably a catch. So, there are expenses associated with a reverse mortgage like having to keep up with insurance and HOA fees, and also pay an upfront insurance premium. This fee usually accounts for 2% of your property’s value. Also, there are fees at closing which are the origination fees.

2. Your heirs won’t inherit much

Property inheritance is the main way to build wealth through generations. However, one of the requirements of a reverse mortgage is to sell the house to pay off the proceeds received throughout the entire period. This means that your heirs will either have to sell the home or give the property to the lender to pay off the debt.

3. Foreclosure

To get a reverse mortgage loan, you should be able to afford taxes for the property, homeowners insurance, and the HOA fees. Not only this, but you must be the principal residence of the home. This comes at risk because if at any time you aren’t able to satisfy these requirements, you might lose the house to foreclosure.