Reverse Mortgage Pros and Cons

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

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Are you approaching retirement age, or have 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 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. 

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. 

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. 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. 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. 

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 grows over time if it remains unused
  • Jumbo loan: receive the total payout at closing without being subject to mortgage insurance
  • 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. Complete a simple online form today to request your free information kit or to speak with a home equity specialist via chat.

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