Reverse mortgages have been aggressively marketed as the best way for senior citizens to finance their expenses. However, failure to consider all factors in the play carefully can lead to serious financial problems such as foreclosure. Granted, a reverse mortgage allows you to convert your home equity into cash, which you can use for expenses such as renovations, taking care of medical bills, or settling your existing mortgage. Still, you need to think carefully about it.
Types of Reverse Mortgages
There are three types of mortgages; single purpose reverse mortgages, proprietary reverse mortgages, and federally insured reverse mortgages. A single-purpose reverse mortgage is only used for one purpose: paying property taxes, home improvements, or repairs. Nonprofit organizations and some local government and state agencies usually provide it. They are primarily targeted at lower-income borrowers.
Proprietary reverse mortgages are private loans offered by companies that develop them. At the same time, the U.S. Department of Housing and Urban Development supports federally insured reverse mortgages or Home Equity Conversion Mortgages. However, while federally insured reverse mortgages can be used for any purpose, they are more expensive than regular home loans due to their high initial costs.
Who is Eligible For a Reverse Mortgage?
If you are over 62 years old and fully own your own home or have a low mortgage balance outstanding that can be fully paid with the reverse mortgage proceeds, you are qualified. You must also demonstrate that you have sufficient financial resources to offset your taxes, pay for insurance and taxes and stay in that home for the entire loan duration.
Let’s have a look at the pros and cons of reverse mortgages.
Pros of Reverse Mortgages
➢ They offer an additional source of income. You can choose to pay the loan in regular installments or as a lump sum.
➢ You retain the ownership rights to your home. A reverse mortgage allows you to stay home without paying monthly installments.
➢ Settles existing mortgage. You can use the loan proceeds to settle any outstanding mortgage balance.
➢ Your beneficiaries can inherit home equity balance. Once they pay off the remaining reverse mortgage loan, your heirs can inherit the home equity.
➢ Proceeds of the reverse mortgage loan are usually tax-free. However, this is determined by certain personal factors. Hence you should consult your tax professional.
➢ They have no impact on Medicare or Social Security payments. However, this depends on personal factors, though there are no penalties for members receiving payments from either program.
➢ Disbursements can be tailored according to your needs. For example, you can get monthly payments or a line of credit.
➢ Your beneficiaries won’t be personally liable should the payoff balance exceed the home’s value.
➢ Interest rates can be lower compared to other credit options.
Cons of Reverse Mortgages
➢ Most homeowners don’t easily comprehend reverse mortgages
➢ The fees involved are mostly higher than those of traditional mortgages. For example, you may be required to pay a loan origination fee, the initial Federal Housing Administration mortgage insurance premium, and FHA mortgage insurance premiums.
➢ There is the risk that the value of the home inheritance could decline with time as proceeds of reverse mortgages are utilized.
➢ It could potentially affect the eligibility of government welfare programs such as Medicaid.