Reverse Mortgage Pros and Cons

Written by Banks Editorial Team
4 min. read
Written by Banks Editorial Team
4 min. read

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Are you nearing retirement age and have a hefty sum of equity in your home? You may be considering a reverse mortgage. It lets you tap into your home’s equity without making monthly payments to the lender. 

But these loans aren’t always ideal for seniors. Follow along to learn why, along with other alternatives that could be more sensible for your financial situation.

Unlock Your Home Equity

What is a Reverse Mortgage?

A reverse mortgage lets you tap into your home’s equity without any tax consequences. You won’t make payments on the loan, though. Instead, the lender will pay you in monthly installments, a lump-sum payment or a combination of the two. 

These mortgage products are reserved for individuals 62 years of age or older. But there generally aren’t any restrictions on how the loan proceeds can be spent, though most borrowers use the funds to cover living and healthcare expenses during retirement. 

How Does a Reverse Mortgage Work?

The loan amount you qualify for is based on the equity you’ve built up in your home. This figure, calculated by the lender, considers your home’s appraised value and the outstanding balance on your current mortgage. The difference between the two is yours to keep. 

But suppose your mortgage is paid in full, and there are no additional loans on the home? In that case, you’d qualify for the total appraised value of your home. However, you’ll still be on the hook for homeowners insurance and property taxes to prevent the house from going into foreclosure. Plus, loan origination fees and closing costs are the homeowner’s responsibility. 

You won’t repay the lender until you sell your home (unless you want to, of course). If you pass away while still living in the property, your heirs can repay the lender or secure a traditional mortgage to keep it. Otherwise, the lender will sell the home.

These reverse mortgage options are available to seniors: 

  • Home Equity Conversion Mortgage (HECM): This popular, government-backed reverse mortgage is available through lenders approved to issue Federal Housing Administration (FHA) loans. Loan amounts are limited to $970,800, and there are no restrictions on using the funds. 
  • Proprietary Reverse Mortgage: This loan option is ideal for seniors who’d prefer a private lender or own a home that doesn’t meet the eligibility requirements for the HECM. 
  • Single-Purpose Reverse Mortgage: funded by charities and local governments, this mortgage product limits the use of funds to a reason approved by the lender. It caters to low and moderate-income homeowners and is only available in a few areas. 

Quick note: HECMs limit the amount you owe to the appraised value. So, if you sell the property for an amount that’s less than what’s owed to the lender, you will not be responsible for the difference. 

Unlock Your Home Equity

The Pros and Cons of a Reverse Mortgage

If you’re considering a reverse mortgage to unlock the equity in your home, weigh the benefits and drawbacks before making a decision.  

Pros of a Reverse Mortgage

  • You won’t have to sell your home, and the reverse mortgage will pay your outstanding balance in full. 
  • You can get the cash you need to cover expenses, pay down debt and build a cash stash if your retirement income is low. 
  • You won’t be liable for income tax on the payments you receive from the lender. 
  • Your spouse or heirs have the option to purchase the home if you pass away. 

Cons of a Reverse Mortgage

  • You’ll have to pay loan origination fees and closing costs to secure a reverse mortgage or risk losing your home to foreclosure. (Some lenders allow you to roll this amount into the loan, though.) 
  • You’re still responsible for property taxes, homeowners insurance premiums, and homeowners association fees. 
  • You’re responsible for maintaining the property and making home repairs per the lender’s guidelines. 
  • Your eligibility for Supplemental Security Income could be impacted. 

Alternatives to a Reverse Mortgage

If you don’t qualify for a reverse mortgage or would prefer to explore other options, these viable alternatives could work for you. 

Home Equity Loan or Line of Credit

A home equity loan acts as a second mortgage. It allows you to borrow a percentage of the equity in your home minus the amount you still owe on the mortgage. Loan proceeds are dispersed in a lump sum, and you’ll repay what you borrow in equal monthly installments since the interest rate is fixed. 

Suppose your home is worth $450,000, you owe $250,000, and the lender approves you for a loan of up to 80 percent of the equity in the property. In that case, you could get a home equity loan for up to $110,000 ($450,000 * .80 – $250,000).

A home equity line of credit is also a second mortgage. However, the loan proceeds are accessible through a pool of funds that you can make withdrawals from at any time during the draw period. You’ll also make interest-only payments on the funds you spend and can also pay down the principal and use the funds over and over again (up to the limit). 

Once the draw period ends, usually after 10 years, the amount you owe is converted into a loan payable over a set amount of time. And the payment amount could fluctuate if you get a variable interest rate. 

Cash-Out Refinance

A cash-out refinance also lets you convert the equity in your home into cash. But unlike a home equity loan or HELOC, it replaces your existing mortgage with a new one that combines what you owe and the equity you borrow. This means you could end up with a higher interest rate. Still, you’ll only have one monthly mortgage payment instead of two.

To illustrate, assume your home is worth $425,000 and you owe $300,000 on the mortgage. If the lender permits you to borrow 80 percent of your home’s equity, you’ll get $40,000 at closing ($425,000 * .80 – $300,000), and your new mortgage balance will be $340,000. 

Home Equity Agreement (HEA)

Would you prefer a debt-free option to access your home’s equity? A home equity agreement (HEA) is an arrangement between a homeowner and investor that lets you get money for your home today in exchange for a share in the future increase or decrease in the property value. 

If you’re interested in a HEA, Unlock may lend a helping hand. It’s a real estate investor that offers co-investments, and you’ll never make monthly payments on the funds you receive. 

Co-investments between $30,000 and $500,000 are available. You’ll need at least 20 percent in equity and a FICO score of 500 or higher to qualify. 

Here’s how it works: 

  • Step 1: Visit Unlock’s website and input your address, home value and the outstanding balances of any loans on the property into the online calculator to view your potential eligibility for a co-investment. 
  • Step 2: Submit a formal application to Unlock. You can complete the form in under 10 minutes, and it won’t impact your credit score. 
  • Step 3: Review your offer and decide how much equity you want to sell to Unlock. 
  • Step 4: Finalize the agreement by signing the investment documents. 
  • Step 5: Get your cash and spend the funds however you choose. 

Unlock gives you up to 10 years to decide if you want to stay in the home or sell it. Either way, Unlock will be entitled to the initial co-investment plus its share of the property value’s increase when the agreement ends. You also have the option to buy out Unlock before the 10-year term, but only after the agreement has been active for at least six months. 

If you’re ready to see how much home equity you can unlock, use the online form to get started.


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