Pros and Cons of a Reverse Mortgage
There’s a lot of misinformation about reverse mortgages — and Tom Selleck can only answer so many questions in 30-second TV spots for AAG. Reverse mortgages can be a lifeline to seniors who are struggling financially, but they’re not for everyone and they do come with risks and expenses. Here’s what you need to know.
With Reverse Mortgages, the Lender Pays You
Reverse mortgages are just another way for homeowners to tap their equity. Like home equity loans, HELOCs and cash-out refinances, reverse mortgages are loans borrowed against equity — but they’re structured differently than the rest.
With regular mortgages, borrowers increase their home equity with each monthly payment they make to their lenders. Just as the name would have you believe, reverse mortgages do the opposite — the lender takes part of the equity in the home and converts it into payments made to the borrower.
The Upside to Reverse Mortgages
Reverse mortgages are available to homeowners ages 62 and older. Seniors can use the payments from these specially structured loans to supplement their incomes, pay for healthcare and meet their expenses. Even better, the money is usually tax-free, even though it’s used as income. You keep the title to your home and your Social Security and Medicare benefits aren’t affected. Perhaps most importantly to seniors concerned with security, you don’t have to pay the money back for as long as you live in your home.
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And Now for the Drawbacks
If you do sell your home, or even if you just move out, you have to pay the money back. If you die first, your spouse or your estate picks up the tab for you, although in some cases, a non-borrowing spouse can remain in the home. Even in those cases, however, the surviving spouse will no longer receive payments since they weren’t on the loan. In a lot of cases, the house is the estate and the home must be sold to pay back the reverse mortgage loan. That’s bad news for any heirs who were expecting a windfall of inheritance.
Other risks include:
- You lose tax breaks: Interest paid on reverse mortgage loans is not tax deductible, even in part, the way interest on a traditional mortgage is.
- The bill grows with time: With every reverse mortgage payment you accept, interest is added to your growing balance and the cumulative effect never ceases for the life of the loan.
- The loans can bring unpleasant surprises: Most reverse mortgages come with variable-rate loans, which means the amount you owe can change over time.
- The expenses of homeownership stay with you: You’re still responsible for the cost of property taxes, homeowners insurance, maintenance, upkeep and repairs.
- Reverse mortgages can be pricey: Like most loans, reverse mortgages come with fees, including origination fees, service fees, closing costs and, in some cases, mortgage insurance premiums.
Read More: How Much Debt Americans Have at Every Age
Keep in Mind…
There are three different reverse mortgage options:
- Single-purpose reverse mortgages are the cheapest — they’re offered by state and local governments and nonprofits
- Proprietary reverse mortgages are private loans
- Home equity conversion mortgages (HECMs) are insured by the federal government and come with fixed-rate loans instead of ARM loans
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Each of these three kinds of reverse mortgages comes with its own set of pros and cons. Do your research before you sign on the dotted line.
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