Property owners who are 62 years and older can take out a reverse mortgage on their home for spendable cash. This can be a beneficial option for many senior property owners who want to stay in their homes for a long time and need extra income. However, a reverse mortgage is not for everyone. Any homeowner considering this option should learn about reverse mortgage pros and cons before diving in.
What Is a Reverse Mortgage?
A reverse mortgage is a loan you can take out using your home equity. In other words, you use your home as collateral for the loan. Once you set up a reverse mortgage, you can receive payments in several ways. These options include a lump sum payment when the loan closes, equal monthly payments, or a line of credit that the borrower can tap into as needed.
A key way a reverse mortgage differs from a traditional loan is that you don’t need to make regular payments. Rather, you will pay for the reverse mortgage when you move out of the property or when you die. Like a traditional loan, you will be charged interest at a fixed or variable rate while you have the reverse mortgage. However, the interest you accumulate gets rolled into the loan balance, which you pay when you close the loan.
Reverse Mortgage Pros and Cons
A reverse mortgage can sound very appealing to many senior property owners. Still, it’s important to consider reverse mortgage pros and cons before taking out this type of loan. Reverse mortgages are known to be complicated, so it’s very important to be aware of legal requirements. However, when all is said and done, a reverse mortgage can be a strategic solution to afford to stay in a home you love.
Benefits of a Reverse Mortgage
A primary benefit of a reverse mortgage is boosting one’s income during retirement. Within this vein, there are some beneficial ways that a reverse mortgage works.
1. Manage Expenses Better in Retirement
Seniors often experience a steep decline in their income after they retire, which can make managing monthly expenses a challenge. For many seniors, their monthly mortgage payments are their biggest expense. Taking out a reverse mortgage can be a helpful way to supplement their income to continue to pay their bills and to stay in their home.
2. Stay Where You Live
Many of us love the homes we live in. For seniors wanting to stay in their home for the long term, a reverse mortgage can help them do just that. Additionally, it might be cheaper to get a reverse mortgage than moving and buying or renting a new spot.
3. No Tax on the Income
Another benefit of a reverse mortgage is that the IRS doesn’t tax the money from this type of loan. Instead, the interest for a reverse mortgage isn’t deductible until you pay off the loan in full.
4. Protection If Loan Balance Exceeds Home’s Value
As a reverse mortgage balance grows in size, it can exceed the property’s fair market value over time. However, the amount of debt you must repay cannot be more than the property’s value.
Downsides of a Reverse Mortgage
Like its potential benefits, a reverse mortgage has several downsides that a property owner ought to consider. Primarily, you will need to pay for a reverse mortgage and the fees that come with it. Additionally, this type of mortgage can be difficult to navigate.
1. You Have to Pay for It
Reverse mortgages have fees associated with them, similar to a mortgage. There can be FHA insurance costs and closing costs that will add to the loan balance. Ultimately, this will mean that the borrower has more debt and less equity.
2. Can’t Take Out as Much with a Fixed-Rate Option
Reverse mortgages can allow for adjustable-rate and fixed-rate financing. However, if you want a fixed rate, you can’t access as large of a loan as you could get with an adjustable-rate reverse mortgage.
3. You Might Violate Other Program Requirements
Taking out a reverse mortgage can affect whether you qualify for Medicaid and other supplemental security income (SSI) programs.
4. Difficult to Navigate Changes in Status
Reverse mortgages can be difficult to navigate on your own, especially when something changes about your status. Changes in your status can include deciding to move to a long-term care facility. In this case, would you still be considered a resident in your home? Or, if you got married after you took out a reverse mortgage, would your spouse need to move out of your home if you died? Changes in status like these may call for the advice of a legal professional.
Is a Reverse Mortgage Right for You?
Everyone’s situation is different, making it that much more important to think through reverse mortgage pros and cons. With Strategic Mortgage Solutions, you can take a deep breath. Purchasing a home and managing your mortgage can be tricky, but we know the industry well. To find your best mortgage options, give us a call or set up an appointment online today.