There are many pros and cons of a reverse mortgage. That’s why it is important to all the facts to decide what is best for you. With a traditional second mortgage, or a home equity line of credit (HELOC), you must have sufficient debt-to-income ratios to qualify for the loan which requires you to make monthly payments.
The reverse mortgage is different in that it allows you to receive payments and is available regardless of your current income. The total amount of payments you can receive are based on a number of factors; current interest rates, your age, the appraised value of your home or FHA’s mortgage limits for your area. The higher the value of your home and the older your age, the more you can borrow, usually up to 50% of the appraised value.
The Benefits of Reverse Mortgages
• A reverse mortgage loan is a great option for seniors who own their own home and want to extract some equity from it in the form of cash.
• Loan origination fees are capped at 2% by law.
• No payments are made from the borrower until the home is sold, the surviving spouse passes, the home remains your primary residence you do not secure additional loans against your home and you remain within the covenants of the reverse mortgage loan requirements.
• If the value of your home when sold is less than the value of the reverse mortgage loan, HUD (The U.S. Department of Housing and Urban Development) will make up the difference to the lender under its loan guarantee program.
• The revenue from a reverse mortgage loan is not taxable for income tax purposes.
• Under the HUD terms for reverse mortgages you can never be forced out of your home unless you fail to abide by the terms of your loan.
• If your reverse mortgage is in the form of a line of credit, the unused amount of the loan earns interest equal to the interest rate charged for the reverse mortgage.
The Drawbacks of Reverse Mortgages
• The costs of obtaining a reverse mortgage loan can be high.
• The interest on a reverse mortgage loan is tax–deductible, but can only be deducted once the home is sold. This process often falls to the heirs or the estate managers.
• There may be loan limits. HUD’s Home Equity Conversion Mortgage (HECM) currently tops out at just over $362,000. Because of this, reverse mortgages might not allow seniors to access all of their home equity or even most of it.
• For seniors who rely on Medicaid and Supplemental Social Security (SSI), they may not be able to receive more in monthly reverse mortgage payments than they plan on spending. Payments from a reverse mortgage that sit in a bank account may put a senior over their allowable limit for liquid assets (as set by these assistance programs).