A reverse mortgage is a loan available to homeowners ages 62 or older. It lets you take advantage of the home equity you’ve built up over the years by getting a lump sum or a stream of income from banks and other lenders.
Unlike other home loans, you receive payments — rather than make them — as long as the loan terms are in effect. You don’t owe payments until you’re no longer living in the home, or no longer meet the mortgage terms. Understand the reverse mortgage pros and cons so you can decide if a reverse mortgage is right for you.
Reverse Mortgage Pros
A reverse mortgage for seniors can help homeowners stay in their own home because it provides access to cash, helping retirees to stretch income from Social Security, savings and pensions. It’s also a useful solution for unexpected healthcare costs, or even necessary home updates. Additional pros include:
- No mortgage payments: You don’t have to make mortgage payments, like you would with a traditional mortgage. Thus, a reverse mortgage is an affordable option for seniors on a fixed income.
- Receive payments: Getting money through a reverse mortgage helps with cash flow.
- No taxes on proceeds: Money you receive from a reverse mortgage is not subject to taxes, which also helps if your income from other sources is inadequate.
- No need to sell your home: A reverse mortgage allows you to tap into the increase in your home’s value without having to sell the home.
- Can delay using retirement savings: Using the money from a reverse mortgage to pay expenses keeps you from having to drum up cash by selling stocks and other investments. This gives such investments more time to grow.
In addition, if you’re under 70 and have yet to take Social Security benefits, a reverse mortgage can give you the cash needed to delay taking such benefits. For people born in 1943 or later, each year you delay taking Social Security — up to age 70 — translates into an additional 8 percent benefit increase, according to the Social Security Administration. Different percentages apply for retirees with birth years prior to 1943.
Reverse Mortgage Cons
Although these mortgages might seem like the perfect solution for cash-strapped senior homeowners struggling to make ends meet, they also have some downsides. Some reverse mortgage disadvantages include:
- Expensive in the long run: Monthly servicing fees, insurance premiums and mortgage interest are added to the amount you initially borrowed, and interest is then recalculated periodically on that amount. That means over time, the amount you owe grows.
- Complicated terms: Reverse mortgage terms can be difficult for many homeowners to understand.
- Involvement of all homeowners required: Everyone listed on the title for the property must also be named on the reverse mortgage, and at least one of you must be age 62 or older.
- Homeownership costs: A reverse mortgage requires you to stay up to date on property taxes, utilities and insurance premiums.
- Residence required: You cannot have a reverse mortgage on a property unless you actually live in the home. So if you move — to a nursing home, for example — the reverse mortgage will come due.
- Possible impact on Medicaid payments: Reverse mortgage loans might impact your payments from Medicaid or other public assistance programs.
In addition, if you take out a reverse mortgage, you might leave nothing for your heirs. With a reverse mortgage, the amount owed increases the longer the loan is in place because of the ongoing fees and interest. The mortgage — with all the extra interest and fees added — is paid off when the house is sold. It’s possible that expense might eat up some or all of the inheritance you planned to leave loved ones.
A reverse mortgage might seem like the perfect solution to help older homeowners enjoy a more comfortable retirement in their own home. And although there are benefits, it’s important to understand the many disadvantages to taking out a reverse mortgage on your home. The more you know about reverse mortgages, the better you’ll be able to make the best decision for your own situation.