A reverse mortgage loan may help provide financial freedom to seniors, allowing them the retirement lifestyle they desire, the ability to pay off medical bills, make home improvements, or to free up some extra cash. Weighing the benefits and risks is important before making any major financial decision. Listed below are some of the potential pros and cons of a reverse mortgage loan.
Homeowners ages 62 and older with sufficient equity in their homes may be eligible for a reverse mortgage loan. A reverse mortgage allows homeowners to convert a portion of their home’s equity into usable funds without having to make monthly mortgage payments1. In addition, you can stay in the comfort of your own home and maintain title1. The funds can be received in a lump sum2 payment, monthly payments, as a line of credit, or a combination of these options. If you sell the home to repay the loan, you or your heirs will never owe more than the value of the property, and no assets other than the home must be used to repay the debt. Your heirs inherit any remaining equity after paying off the loan.There are potential drawbacks to consider as well. The balance of the reverse mortgage loan will accrue interest and increase over time and thus the value of the estate inheritance may decrease. Fees, including the loan origination fee, may be higher than with traditional forward mortgages. Reverse mortgage fees also include an initial Federal Housing Administration (FHA) Mortgage Insurance Premium and the annual FHA mortgage insurance. Need based government programs such as Medicaid may be affected by reverse mortgage loan proceeds. You are encouraged to consult a trusted financial advisor and appropriate government agencies for any effect on government benefits.
Summary of Reverse Mortgage Pros
- You can receive the funds in a lump-sum2 payment, monthly payments, as a line of credit or a combination of these options
- You can stay in the home without making monthly mortgage payments1
- You maintain title of your home1
- Your heirs are not personally liable if the loan balance exceeds the value of the home
- Your heirs inherit any remaining equity after paying off the reverse mortgage
Summary of Reverse Mortgage Cons
- Reverse mortgage loan balance increases over time
- Value of estate inheritance may decrease over time as interest accrues on the loan balance
- Fees can be higher than a traditional mortgage
- Initial FHA Mortgage Insurance Premium
- Annual FHA mortgage insurance
- Although Social Security and Medicare eligibility are typically not affected by a reverse mortgage loan, needs-based government programs such as Medicaid may be affected
The amount the borrower receives is based on the age of the youngest borrower, current interest rates and the lesser of the appraised value of the home, or the sale price up to the maximum lending limit.
Additionally, all potential borrowers are required to meet with a Department of Housing and Urban Development (HUD) approved reverse mortgage loan counselor as part of the loan application process. During the session, the counselor will discuss the reverse mortgage loan process, the expectations of the borrower throughout the life of the loan, and will answer any questions the homeowners may have regarding the loan. Family or trusted advisors are encouraged to attend the counseling session to make sure all of their questions or concerns are also addressed.
A reverse mortgage loan may not be right for everyone, and not everyone will be eligible to receive one. For more information about reverse mortgage loans and the pros and cons, please call 866 404.6138.
1 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance, and maintain the home according to FHA requirements. Failure to meet these requirements can trigger a loan default that may result in foreclosure.
2Only available for fixed-rate loans.
