A reverse mortgage is a tool – a financial instrument. There is no reason to jump to conclusions that a reverse mortgage is bad. As a matter of fact, I think for many retirees reverse mortgage pros far outweigh the cons.
Reverse Mortgage Pros
- No monthly payments required
- No income or asset requirements
- No minimum credit score
- No restrictions on use of proceeds
- It provides tax-free income
- Loan is non-recourse: you can never owe more than the value of the property
- No personal guaranty is required
- May be titled in your trust or life estate (such as a revocable living trust or irrevocable trust)
- Provides guaranteed income
- Reverse mortgage programs are federally mandated, so expenses and terms are consistent across lenders
- The government insures your reverse mortgage so if your mortgage value goes up beyond the value of your home the lender cannot take your home and you do not owe the difference, nor does your family
- When you sell your home, just as with any mortgage, the mortgage gets paid off and any additional equity belongs to you
- You can borrow somewhere between 55% and 70% of your home’s value
- Reverse mortgages do not affect your credit score
- You own the property at all times
Uses of a reverse mortgage:
- As a line of credit to provide liquidity
- To reduce risk of outliving assets
- To provide cash so you can defer Social Security start date
- To fund long term care insurance
- To pay off your existing mortgage and eliminate your mortgage payment
- To pay for in home care later in life
Learn more: Reverse Mortgage Guarantees Income for Life.
Reverse Mortgage Cons
- If you move within a few years of taking out your reverse mortgage the fees you pay may not be worth the benefit you receive
- You must pay your real estate taxes and maintain the home or the loan can be called in
- You must be at least 62 to take out a reverse mortgage (for couples, age is determined by the younger of the two)
When a reverse mortgage is not a good idea:
- You die tomorrow
- You move next week
- You tend to spend too much, perhaps through giving to your children, and thus may end up not being able to continue to pay the property taxes one day
- If you are eligible for Medicaid, in certain cases proceeds from a reverse mortgage may affect your eligibility, so do your home work first. See Reverse Mortgage and Medicaid.
When does your reverse mortgage loan become due?
- Just like any mortgage when the property is sold
- When the borrower passes away (last remaining borrower) then the estate has up to one year to pay off loan
- When the borrower no longer occupies the home for over 12 months then you have up to one year to pay off the loan by selling the home, refinancing, or simply paying the loan off.
Learn more: Before You Consider a Reverse Mortgage.
3 Factors Determine How Much You Can Get
- Age of the borrower – the younger you are the less you can receive
- Value of the property – maximum $625,500 value used
- The type of reverse mortgage program you pick
Estimate how much you can get with a reverse mortgage calculator.
How is the cash from your reverse mortgage received?
- Lump sum
- Term monthly payments
- Line of credit
- Or any combination of the above
Some People Say One Reverse Mortgage Con Is That They are Expensive
If you have heard that a reverse mortgage is expensive, you need to ask "expensive compared to what"? Moving is expensive too. Below are estimated costs for selling a $400,000 home:
Estimated costs of selling a $400,000 home:
- Realtor @5%: $20,000
- Home repairs: $10,000
- Moving expense: $5,000
- Total: $35,000
Compare that to estimated costs for a reverse mortgage on a $400,000 home:
- HUD “MIP” @ 2%: $8,000 (this is HUD’s upfront mortgage insurance premium)
- Points (sliding scale): $6,000
- Closing costs: $3,500
- Total: $17,500
When you factor in taxes, a reverse mortgage may also cost less than liquidating investments.
Where Can I Find a Knowledgeable Reverse Mortgage Loan Officer?
Check out iReverse Home Loans. They provide a search feature to help you locate a reverse mortgage specialist.
Thanks to Alain Valles of Direct Mortgage Finance for sharing most of the information in this article. The reverse mortgage section of Alain’s website provides additional info in Top 10 Reverse Mortgage Questions.