Getting a reverse mortgage may be the last step you need to take to secure your retirement. This government regulated loan may provide the extra proceeds needed to establish a safety net for the future, but it’s not for everyone. Without a doubt, the reverse mortgage – also known as a Home Equity Conversion Mortgage – is a complex financial tool. Between the adjustable rate HECM, the fixed rate HECM, and the HECM for purchase, there are many variations of the reverse mortgage suitable for different situations. If you’re on the fence about getting a reverse mortgage, the following descriptions of its pros and cons may help you decide.
Reverse Mortgage Pros
As long as you meet all obligations such as paying property taxes, homeowners insurance, and maintenance expenses, getting a reverse mortgage will be able to benefit you in the following ways:
- It will eliminate any existing mortgage on your home.
- You will still own your home.
- No monthly payments are required.
- The extra money from a reverse mortgage can act as a safety net that will help protect you from sudden financial emergencies.
- Reverse mortgages are non-recourse loans. Even if your loan balance exceeds the value of your home, you will not be responsible for this excess. In other words, you will never have to pay more than the value of your home once the loan comes due. This also means that even if your lender goes out of business, you will still receive your money from the federal government.
- There is no credit score requirement at this time.
- Because closings costs and other outgoing fees such as the Mortgage Insurance Premium (MIP) can be financed with the loan itself, out-of-pocket expenses can be minimal.
- In general, reverse mortgages will not affect Social Security and Medicare benefits. We recommend speaking to your financial advisor.
- Reverse mortgage counseling is a mandatory part of the application process. This is done to ensure that borrowers know exactly what they’re getting into.
- You can buy a new home with a reverse for purchase.
- You can choose how to receive your money in many different ways. You can receive it as a lump sum, in monthly installments, or leave it to grow as a line of credit.
- By choosing a reverse mortgage line of credit, you’ll have the opportunity to allow your available funds to keep growing. If this growth continues for long enough, it may even exceed the value of your home.
Reverse Mortgage Cons
Although reverse mortgages offer a wide array of benefits, they also come with some drawbacks. Depending on your own individual situation, you may want to reconsider a reverse mortgage for the following reasons:
- If you do not make payments, the loan balance can increase over time as interest and fees accumulate.
- In order to protect borrowers from default, a Financial Assessment will be conducted to determine the chances that a borrower will stay on top of mandatory maintenance/upkeep obligations. Although getting a reverse mortgage does not depend on a strict credit score requirement, borrowers with a poor credit history may have to accept a Life Expectancy Set Aside (LESA), which uses a portion of their proceeds to pay their property taxes and homeowners insurance for a specific amount of time.
- When property taxes, homeowners insurance, and other maintenance obligations are not maintained, the loan may become due and payable. Additionally, when the last surviving borrower either passes away or moves out of the home, it will come due.
- The loan may affect Medicaid and Supplemental Security Income. We recommend consulting with a financial advisor to confirm how this will affect you before making a decision.
Knowing the pros and cons of a reverse mortgage will help you determine if the loan is right for you and will prepare you for any bumps you may hit along the way.