One of the retirement planning tools that is gaining popularity during this time of economic uncertainty is the reverse mortgage loan. With a reverse mortgage, a senior citizen can receive money from the lender in the form of a home equity loan. Â Additionally, this type of mortgage does not have to be paid back until the borrower moves out of the home or passes away. As a result, a reverse mortgage can provide a decent stream of income for a retiree.
Before you jump into a reverse mortgage, it is important to consider the pros and cons of this type of loan.
The Pros of Reverse Mortgages
One of the main advantages of a reverse mortgage is that you do not have to make monthly payments on it. In fact, you make no payments at all until you vacate the house and it is sold ― and the proceeds from that sale are used to repay the loan. Additionally, if you get an FHA-approved reverse mortgage (such as the Home Equity Conversion Mortgage, HECM) you can never owe more than your house is worth. This is true regardless of how much money the lender provided you with.
Another advantage is that your income and credit score are not considerations, and will not affect your loan approval. It is relatively easy to qualify for a reverse mortgage as long as you meet the age requirement (62+), reside in the home, and have sufficient home equity built up.
The Cons of Reverse Mortgages
There are, of course, drawbacks to a reverse mortgage loan. One of the biggest disadvantages is that these loans often come with higher interest rates and fees. Reverse mortgages are notorious for high fees, and you will have to shop around carefully to avoid them.
Another issue of concern is that you might be forced to leave your home due to an illness or other debilitation. As soon as you move out of your home, your reverse mortgage will be due and the property will be sold to repay the loan. This is because you have to be living inside the home and using it as your primary residence in order for the reverse mortgage to be valid.
If you want to leave the home to your heirs, a reverse mortgage is not a good idea. While selling your home is not always required to pay off the loan, in many cases the reduction to your estate would be too much otherwise. Owing money on a reverse mortgage can be a sizeable expense on your assets and it can reduce the inheritance you are able to leave behind.
Before you make any decisions, make sure to weigh all of these issues and carefully consider whether a reverse mortgage is right for you.