Pros and Cons of Reverse Mortgages

Every type of home loan brings advantages and disadvantages, and reverse mortgages are no different. As baby boomers are entering retirement age, many of them are opting to supplement their incomes by tapping into the equity they have built into their homes. Reverse mortgage loans are one tool that allows those over the age of 62 to borrow against their largest asset, but they aren’t a good choice for everyone.

If you are approaching the milestone of retirement and are contemplating visiting a reverse mortgage lender to tap into your home equity, you need to know both sides of  reverse mortgages.

Advantages of Reverse Mortgages:

There are many factors that can make reverse mortgages seem especially appealing, including:

• Reverse mortgage loans do not need to be paid until either the house is sold, or the reverse mortgage holder moves or dies. In the case of the latter, the estate will be responsible for settling the final debt.
• Since reverse mortgages are only given to those who use their home (the collateral) as their primary residence, homeowners will still have a place to live.
• Borrowers using reverse mortgages have the right to choose their disbursement and can select from a lump sum, a line of credit or even monthly payments. The method of disbursement can be changed at any time.
• The borrowed money is not taxable.

Disadvantages of Reverse Mortgages

These specialized types of loans also have several disadvantages you need to consider before committing to one:

• There are initial closing costs and fees can be as high as $5,000 to $6,000. Some major lenders are discounting closing costs to compete for borrowers, but these cuts are generally applied to fixed-rate loans only and must be paid to borrowers in a lump sum.
• Reverse mortgage holders still own the homes that they live in, so repairs and tax bills remain the obligation of the homeowner.
• Your reverse mortgage lender may require you to carry private mortgage insurance to ensure that they can collect on the agreement.
• Unless you sell your house and pay off the reverse mortgage debt, upon your passing your heirs will have to finish paying off your loan.
• A reverse mortgage will reduce the amount of equity you have in your home, as you will be borrowing against it.
• Home loan rates for reverse mortgages can be substantially higher than traditional mortgages as the lenders will have to wait many years before they can recoup their money.

If you are thinking about supplementing your retirement income with money from a reverse mortgage, it is imperative you check with your financial adviser to ensure securing a reverse mortgage is the right step for you.