Pros and Cons of Reverse Mortgages

One legitimate fear that seniors face is the possibility of running out of money. If you are a senior who owns a home, a Reverse Mortgage is a way to turn a portion of your home equity into cash to supplement your income.

 

Pros

  • Provides flexible disbursement options
    (e.g., lump sum, monthly or line of credit)
  • Homeowner stays in the home without making monthly mortgage payments*
  • Eliminate any existing mortgage
  • Heirs are not personally liable if payoff balance exceeds home value
  • Heirs inherit remaining home equity after paying off the Reverse Mortgage loan
  • Proceeds are tax-free**
  • Interest rates may be lower than other options

Cons

  • Value of estate inheritance may decrease over time as proceeds are spent
  • Fees are typically higher than with a traditional mortgage, such as the following:
    • Initial Federal Housing Administration (FHA) mortgage insurance premium
    • Ongoing FHA mortgage insurance premiums
    • Loan origination fee
  • Although a Reverse Mortgage loan generally does not affect eligibility for Social Security and Medicare, needs-based government programs such as Medicaid may be affected**
  • Reverse Mortgages are not well understood by many people

*Reverse mortgages increase the principal mortgage amount and decrease home equity (it is a negative amortization loan). Borrowers are responsible for paying property taxes and homeowner’s insurance (which may be substantial). We do not establish an escrow account for disbursements of these payments. A set-aside account can be set up to pay taxes and insurance and may be required in some cases. Borrowers must occupy home as their primary residence and pay for ongoing maintenance; otherwise the loan becomes due and payable. The loan also becomes due and payable when the last borrower, or eligible non-borrowing spouse, dies, sells the home, permanently moves out, defaults on taxes or insurance payments, or does not otherwise comply with loan terms. These materials are not from HUD or FHA and were not approved by HUD or government agency. See Department of Housing and Urban Development’s Mortgagee Letter 2014-10 for more information with regard to FHA requirements for advertising reverse mortgages. Information is provided as an advertisement and is not a guarantee of lending.
** Consult your financial adviser and appropriate government agencies for any effect on taxes or government benefits.

Additional Information