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.
There are potential drawbacks to consider as well. The balance of the reverse mortgage loan will increase over time and the value of the estate inheritance may decrease as funds are spent. Fees, including the loan origination fee, may be higher than with traditional forward mortgages. Reverse mortgage fees also include the initial Federal Housing Administration (FHA) Mortgage Insurance Premium and the annual FHA mortgage insurance (1.25% of reverse mortgage loan balance). Need based government programs such as Medicare may be affected by reverse mortgage loan proceeds. Therefore, 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-sum payment, monthly payments, as a line of credit or a combination of these options
- You can stay in the home without making monthly mortgage payments
- You maintain title of your home
- Proceeds are tax-free
- Your heirs are not personally liable if payoff balance exceeds home value
- 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 proceeds are spent
- Fees can be higher than a traditional mortgage
- Initial FHA Mortgage Insurance Premium
- Annual FHA mortgage insurance (1.25% of loan balance)
- 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, sale price or 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.