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If you watch TV, you’ve likely seen Tom Selleck and Henry Winkler touting reverse mortgages as a valuable income source for anyone retired or with limited funds. These types of loans can be worth getting, but they aren’t for everyone. Here are the pros and cons.
Many seniors experience a significant income reduction when they retire. A reverse mortgage allows you to supplement that diminished income without digging into savings. You don’t have to make monthly payments, either, which could help free up room in your monthly budget.
Instead of leaving your home, a reverse mortgage allows you to age in place. Additionally, while a reverse mortgage comes with fees and other costs, it might cost less in the long run than buying another home or renting in a new location.
The money you get from a reverse mortgage isn’t taxable because the IRS considers it “loan proceeds,” not income. (However, it could be considered income by other agencies — more on that below.)
Because a reverse mortgage balance grows over time, it’s possible that what you owe can eventually exceed your home’s value. However, because a reverse mortgage is what’s known as “non-recourse” financing, the amount of debt that must be repaid can never exceed the property’s value. That also means the lender can’t make any claims against your other assets or those of your heirs.
A borrower can pay off their reverse mortgage at any time, but typically, repayment doesn’t happen until it’s required: when the borrower moves, sells the home or passes away. In an estate situation, this leaves heirs with potentially several choices:
That last option allows the lender to file a claim for any unpaid balance with the insurer (almost always the Federal Housing Administration, or FHA, which oversees the Home Equity Conversion Mortgages, or HECMs, the most popular type of reverse mortgage).
Reverse mortgages come with fees, including:
Many of these expenses can be rolled into the loan principal; however, that can substantially increase the amount you owe.
You might have enjoyed the mortgage interest deduction on your taxes when you were paying off your mortgage, but you won’t be able to deduct the interest on a reverse mortgage each year. You’ll only enjoy that perk when the loan is paid in full.
A reverse mortgage could cause you to violate asset or income restrictions for the Medicaid and Supplemental Security Income (SSI) programs. This might affect your eligibility for these benefits.
A reverse mortgage doesn’t let you off the hook for property taxes, homeowners insurance premiums and HOA fees. If you fail to pay any of these expenses in a timely manner, that violates the reverse mortgage agreement and your home could be foreclosed.
When the borrower is no longer living in the home, the reverse mortgage either has to be repaid in full or the home surrendered to the lender. This scenario could be triggered by death, but also by moving to a nursing home or long-term care facility.
This situation can cause complications for those non-borrowers still living in the home. While there are protections in place for surviving spouses, they only apply if you were married prior to obtaining the reverse mortgage.
The amount to repay could be a lot larger than you anticipated, too. If you never or only minimally repaid the balance before the triggering event, it might be all the more challenging to repay now.
With all the potential complexities and risk, is a reverse mortgage a good idea? For some homeowners, the answer might be yes if:
If you’re a senior having a hard time paying bills, many states and local utilities and organizations offer help. AARP maintains a list of benefit programs by state.
Here are a few signs that a reverse mortgage isn’t right for you:
Reverse mortgages have gained a reputation thanks to some scams that target unsuspecting seniors. Even legitimate companies have used dishonest marketing to try to get homeowners to take out reverse mortgages. The simple rule is: Be very cautious about putting your home at risk.
Still, there’s at least one key reason you might consider a reverse mortgage: elevated equity. Over the past few years, home values have grown, giving many homeowners a much bigger opportunity to tap their equity.
Remember that you have other options to access cash, too. Compare a home equity loan versus a reverse mortgage to see which one might be a better fit for your needs.
If you’re considering a reverse mortgage, begin by reviewing the reverse mortgage requirements to make sure you qualify. A reputable reverse mortgage lender can help you learn more about your options.
The key requirements for a reverse mortgage include being of eligible age (62 or older, or 55 or older in some cases), having enough equity in the home and remaining in the property. For the latter, that includes maintaining a homeowners insurance policy, keeping the home in livable condition and continuing to pay property taxes.
Learn more: Reverse mortgage requirementsIf you don’t qualify for a reverse mortgage, you might qualify for a home equity loan, cash-out refinance and a home equity line of credit (HELOC).
