Reverse Mortgage Pros and Cons

Are you approaching retirement age, or have you already retired? If your income drops when you retire or have already done so, you may be considering a reverse mortgage to provide the extra cash you need for a more comfortable retirement. These home loan products come with some key benefits to consider. Still, some downsides must be evaluated to make an informed decision.

What is a Reverse Mortgage, and How Does It Work?

A reverse mortgage is a home loan that lets you convert your equity into cash without having to make monthly loan payments. Instead, the loan is repaid when you pass away or if you or your heirs decide to sell the home. 

You must be 62 years or older, own the home outright and use it as your primary residence to qualify for a reverse mortgage. There are also other eligibility criteria. Plus, you’ll be on the hook for homeowners insurance, property taxes and maintenance as long as you remain in the home. 

If you’re eligible for a loan, you can opt to receive a lump sum payment or monthly installments or access the funds through a line of credit that could increase over time (depending on how much you borrow from it). 

Reverse Mortgages vs. Traditional Mortgages

A reverse mortgage operates the opposite way of a traditional mortgage. Instead of you making monthly principal and interest payments over the loan term until the balance is paid in full, the lender will make payments to you based on the form of disbursement you select. 

Any interest that accrues will also be added to the outstanding mortgage balance each month, decreasing your home equity over time. The loan isn’t payable until you move out or pass away. Either way, the home will be sold to repay the loan, and any remaining equity will be distributed to your estate (if applicable). Or your heirs can pay off the reverse mortgage balance or refinance it if they decide to keep the home. 

Pros of a Reverse Mortgage

There are several benefits of getting a reverse mortgage. 

Helps With Your Retirement

Some retirees have minimal cash reserves or retirement savings but a sizable amount of equity tied up in their homes. A reverse mortgage lets them convert the equity into cash without taking on more debt. 

Supplement Your Retirement Income

It’s no secret that many seniors take a hit on their income when they retire. And unfortunately, their expenses don’t follow suit. However, a reverse mortgage lets you eliminate that pesky monthly mortgage payment and receive cash on a consistent basis to fill income voids and live more comfortably. 

You Can Keep Your Home

You won’t have to sell your home to access your equity. Instead, you can stay put while receiving either a lump-sum payment, access to a line of credit or monthly payments from the lender. 

No Monthly Mortgage Payments

When you take out a reverse mortgage, your remaining mortgage balance (if any) is paid in full, eliminating the need to continue making mortgage payments. This perk is arguably the most significant benefit of taking out a reverse mortgage.

Guaranteed Funding for Life

You can choose the tenure disbursement, which means you’ll receive monthly payments from the lender as long as you’re alive. 

Use the Funds However You Want

There are no restrictions on using the proceeds from the reverse mortgage, making it a flexible solution for retirees or individuals approaching retirement age. 

No Tax Liability

The funds you get from a reverse mortgage aren’t considered taxable income or subject to federal and state taxation. So, you can avoid going into full-blown panic at tax time or having to worry about how you’re going to pay Uncle Sam. 

Cons of a Reverse Mortgage

Unfortunately, there are also disadvantages of reverse mortgages, and they may not be the best deal for you.

There are Fees and Costs You Have to Pay

It’s not uncommon for reverse mortgage loans to come with higher borrowing costs than traditional home loans. These include origination fees, closing costs, service fees and Federal Housing Administration (FHA) insurance (if applicable). Although you’ll avoid making payments on a monthly basis, the total loan balance will grow over time. 

Risk of Foreclosure

You could lose your home to foreclosure if you cannot make timely homeowners insurance and property tax payments. The same applies if you don’t make HOA or CDD payments (if applicable) or fail to use the home as your primary residence. 

May Impact Your Other Retirement Benefits

Some need-based government programs, like Supplemental Security Income (SSI) and Medicaid, may consider funds from a reverse mortgage when determining if you’re eligible for benefits. 

Your Heirs May Inherit Less

Your home must be sold when you pass away unless your heirs pay off the reverse mortgage. The amount owed could easily exceed the home’s value, leaving your heirs with little to no equity. 

Beware of Scams and Predatory Tactics

Not all reverse mortgage lenders are reputable. So, if a loan offer sounds too good to be true, it probably is and should be avoided at all costs. 

Should You Get a Reverse Mortgage?

It depends on your unique financial situation. However, a reverse mortgage could be ideal if you want to stay in your home without making monthly mortgage payments and can afford the upkeep, including maintenance, insurance and taxes. And by staying put for an extended period, you’ll have a chance to break even since reverse mortgages come with closing costs and other fees. 

It also makes sense if your home continues to appreciate rapidly, and taking out a reverse mortgage won’t suck all the equity out of the property. Many seniors also turn to this type of home loan product to access the cash needed to survive financially during retirement without taking on more debt. 

However, you could be better off steering clear of a reverse mortgage if: 

• You are dealing with serious health issues and may have to relocate to an assisted living facility. If the time comes when you need to move for additional care, the outstanding balance could become payable immediately. 
• You can afford the upkeep of your home. As mentioned above, you’ll be responsible for maintaining the property to abide by the conditions set forth in the lending agreement. But if you’re struggling to get by and covering the cost of upkeep on the home is placing an additional strain on your finances, a reverse mortgage likely isn’t the best fit. In this case, you may be better off selling your home and downsizing into a property you can afford that doesn’t require a ton, if any, upkeep. 
• Your home value is declining. If the housing market has caused your home value to take a hit, a reverse mortgage will likely absorb all the equity. 
• You’ll be relocating soon. If you take out a reverse mortgage and relocate soon thereafter, it probably won’t be a worthwhile financial move, considering the added costs that come with this loan product. 
• You don’t want to let go of your home for personal reasons. If your home holds sentimental value or you’d like to keep it in the family, a reverse mortgage could be risky. 
• You plan to pass your home to heirs. When you pass away, your heirs will be on the hook for the mortgage balance if they wish to inherit the home. 

How to Get a Reverse Mortgage

If you decide a reverse mortgage is right for you, the next step is finding a reputable lender that puts its customers first. Consider AAG, the leading home equity conversion mortgage (HECM) lender nationwide. It’s accredited by the Better Business Bureau (BBB) and offers the following reverse mortgage loan products: 

• Lump-sum payout: access 60 percent of the payout in the first year
• A growing line of credit: get a line of credit that increases over time if it remains unused
• Jumbo loan: receive the total payout at closing without being subject to mortgage insurance premiums
• Term or tenure: receive fixed monthly payments over a set number of years (term) or for the rest of your life (tenure)
• Reverse for purchase: use the loan proceeds to buy a new home that doesn’t come with monthly mortgage payments

AAG also holds a 90 percent customer satisfaction rate and over 12,000 positive reviews from past and current customers. Visit the website today to request your free information kit or to speak with a home equity specialist via chat.

Reverse Mortgage Alternatives

Many seniors find that there’s a lot to love about reverse mortgages. Still, there are instances where they may not make financial sense to you. There are alternatives, though, that should be considered to lower your housing costs, tap into your home equity or both. 

You may be eligible for traditional rate-and-term finance that lets you: 

• Secure a lower interest rate than you currently have
• Extend your loan term

Either way, the end result is a more affordable monthly payment that works better for your retirement budget. 

Another option is a cash-out refinance or a home loan that allows you to convert a portion of your home equity into cash. You’ll get the cash along with a new loan that replaces your current one and includes the amount of cash you pull out. 

To illustrate, assume the lender approves you for a cash-out refinance and limits the amount of home equity you can pull out to 80 percent. If your home is worth $350,000 and you owe $125,000 on your mortgage, you can potentially access up to $155,000 [($350,000 * .80) – $125,000] in cash. At closing, you’ll sign for a new loan of $280,000 ($155,000 + $125,000), and the new lender will pay off your existing mortgage. And once the new loan is funded, the cash you pull out will be wired to you – usually within a few business days. 

If neither of these options works for you, consider a home equity line of credit (HELOC) or home equity loan. You should have a hefty amount of equity in your home to ensure you can access the amount you need. Keep in mind that home equity loans and HELOCs act as second mortgages. So, if you fall behind on the loan payments, your home could be foreclosed.