Reverse Mortgage Pros and Cons
Reverse mortgage is a popular method for seniors wishing to borrow against the equity in their home without having to pay the loan back until after the property is sold, the senior passes away, or the senior moves out of the property.
However, it's a good idea to understand a few of the pros and cons of this issue before you sign on the dotted line.
This type of mortgage first became available in the 1960s, and are also known as Home Equity Conversion Mortgages, offered and overseen by Housing and Urban Development (HUD). At its most basic definition, it transfers home equity into cash for homeowners. The amount borrowed depends on age, current interest rates, loan fees, and the value of the home.
Offers a variety of benefits for senior homeowners, including the ability to stay in their home without making home loan repayments as long as the home is occupied and seniors follow guidelines and loan terms. In most cases, these are available to individuals to 62 years of age or older.
Seniors taking advantage of this type of mortgage may use the equity in their home in any manner they choose, including vacations, home improvements, medical expenses, or travel. Eligibility is not based on credit history or income and offers interest rates similar to home equity mortgage rates or traditional home loans. In most cases, banks or lending institutions will offer counseling services to ensure the senior(s) or family members are informed about details so seniors can make educated and knowledgeable decisions. The home owner may have a choice of cash or an annuity reverse settlement or closing.
Reverse mortgages don't have a prepayment penalty and enable homeowners to finance upfront fees so they're not taken out of the lump sum.
These also come with a variety of drawbacks, which consumers should be aware of. One of those drawbacks is that they often have higher up-front fees than other traditional types of mortgage financing, and may have a negative impact on elderly government assistance or support programs and benefits.
These may also impact a senior's ability to qualify for Medicaid. Seniors should determine whether or not untapped equity of a home is considered an asset that determines Medicaid eligibility in their state. In most cases, Federal legislation places exemption at roughly $500,000.
Some may require a variety of up-front fees, including interest, origination fees, points, and closing costs that are traditionally higher than traditional loans.
Because the amount of the mortgage will be deducted from sales cost when the property is sold, consumers should also be aware that equity may be close to nonexistent when the home is sold, leaving little to pass on to heirs or to pay leftover expenses such as medical bills, hospitalization costs, or other debts.
Interest accrued on reverse mortgages are not deductible on income taxes until the loan becomes due and payable, and the full amount of the mortgage may be due and payable if any of the terms of the contract are broken.
Borrowers should also be aware that they are expected to maintain mortgage insurance, traditional homeowners insurance, upkeep on home repairs and prompt payment of real estate taxes. Seniors should also be aware of what is considered a vacated property. If Mom falls and has to stay in a nursing home for a temporary though extended visit, will she lose her home? Determine the period of time a home may be vacant according to the company providing this type of mortgage.
While the pros and cons offered here are only a few of the many considerations, it should offer seniors a basic idea of what's involved. Take the time to do your homework to determine the benefits and drawbacks and make sure you understand loan terms and regulations according to your state guidelines before entering into an agreement. As always, contact your financial adviser, your family and your attorney when considering any decision of this sort.