Benefits and Drawbacks to Reverse Mortgages

There are many myths in today’s market fueled by stories of the reverse mortgages of the past. The most common misconception is that you will have to give up ownership of your home to the lender upon passing away, or that with time you may be forced to move from the home or start making payments on the money borrowed. It’s been decades since those types of reverse mortgages were utilized, but that past still haunts seniors today who fear the unknown about these mortgages. The fact is that reverse mortgages are a safe and secure way to improve your lifestyle without ever giving up the ownership or equity in your home. The benefits to a reverse mortgage are many, and the drawbacks are few. However, full preparation and planning is a must as you decide what is right for you. The benefits of a reverse mortgage include:

Tax free money that does not affect Social Security or Medicare benefits.

The money received from a reverse mortgage comes from a loan you take against your home’s equity and is not considered taxable income. As a result you get the full benefit of these funds without giving any part of them to Uncle Sam.

Eliminate mortgage payments without giving up home ownership or its associated privileges.

A reverse mortgage is a loan that enables senior homeowners, ages 62 and older to convert part of their home equity into tax-free income – without having to sell their home, give up title to it, or make required monthly mortgage payments. FHA insures that you will never lose ownership or be forced to make payments or move from the home as long as you choose to live there. Further, the title to your home stays in your name until you chose to move or you pass away. At that time the mortgage and accrued interest is paid in full and the remaining equity is disbursed to you and/or your heirs. Because there are no payments associated with these loans, the program only allows a certain percentage of the home’s value to be borrowed, thereby ensuring there is always equity in the home. The percentage you may borrow is dependent on your age and the location of the property.

Keep the ability to leave the home and equity to your children and/or heirs. Should you pass away while living in the home you can still pass on the ownership of the home to your children and heirs. They may choose to keep the home or sell it. If they keep the home they will need pay the reverse mortgage balance in full – by way of a refinance or cash; or, if they chose to sell the home they claim all remaining equity once the reverse mortgage and its accrued interest is paid in full. In either event there is an allotted 6 month period for this process.

Freedom and flexibility to live an improved independent lifestyle. A reverse mortgage allows seniors to tap into money they’ve earned in the form of home equity, and in some cases avoiding having to depend on others for financial assistance. The money you get from the reverse mortgage is yours to use as you please. Do you have medical bills? Do you need to upgrade your home to fit physical needs? Maybe you just want to finally be able to travel and have more security – the decision is yours. With these funds you may live a better lifestyle without giving up your home ownership.

Purchase a home using a reverse mortgage. Should you choose to move now, or sell and move later you may use a reverse mortgage to purchase your new home. Once again you will have no mortgage payment as long as you live in your new home. The only stipulation is that you can only have one reverse mortgage at a time, and it must be on your primary dwelling.

No credit or income requirements to qualify. Reverse mortgages are underwritten and approved based on your age, the loan to value- percentage of equity in your home- and the location of your home. Because you have no payment requirements on the home, credit and income figures are not used to qualify or disqualify you from the loan.

Protection from Market Volatility. Once you sell your home or pass away you and/or your estate retains any remaining equity after the reverse mortgage and its accrued interest is paid in full. However, should market conditions worsen, or should any event occur leaving the balance of the reverse mortgage at a greater amount than its value, neither you nor your heirs will be required to pay the shortfall. FHA insurance protects lenders from these losses and guarantees that you will never be displaced from the home, and will never have to make a regular mortgage payment on that loan. As a result, you can borrow against your home now without the risk of losing it.

Sound too good to be true? There is a catch – your closing costs on the reverse mortgage include an insurance premium to FHA that pays for this protection. As a result, a reverse mortgage typically carries slightly higher closing costs than a traditional mortgage. You and your heirs are therefore protected in part from the housing market. You get the equity if home values go up, the lender takes the loss if the home is worth less than the payoff of the mortgage.

Closing costs. The closing costs on reverse mortgages are generally speaking a bit higher than traditional mortgages. These costs include paying the upfront FHA insurance premium and other costs associated with getting the reverse mortgage. However with the exception of the appraisal, these closing costs are not charged out of pocket, but are reduced from the loan proceeds upon closing. The appraisal fee can usually be refunded to you at closing.

Reduced equity in the home. Once you borrow money against your home equity a lien is placed against your home. That lien must be paid off once you sell the home or pass away. As a result there will be less equity proceeds going to you or your heirs upon selling the home because the reverse mortgage balance borrowed originally, plus its accrued interest must be paid off at that time. However should this balance be greater than the value of the home you will not be obligated to pay the shortfall.

Loan Responsibilities. You must adhere to loan responsibilities as agreed upon at closing. The primary responsibilities are: reside in the home as your primary residence, pay for property charges such as taxes, hazard insurance and homeowner association dues and maintain the property in reasonable condition. Failure to meet these responsibilities may result in the loan becoming due and payable.