A reverse mortgage allows homeowners age 62 and older to convert part of the equity in their home into cash without having to sell their home.
These loans aren’t a cure-all for retirement money problems, though. Consider these risks and benefits.
PRO: Supplemental retirement income
Some people are house-rich and cash-poor. Assuming borrowers can manage the expenses of owning a home, the reverse mortgage provides a way to liquefy a portion of the home equity to cover financial obligations. This could be helpful in the event of an unexpected job loss, health issues or limited savings. Reverse mortgages can also be a funding source to diversify investment portfolios, although loan fees add to the upfront costs.
PRO: Pay off an existing mortgage
With enough equity in the home, a reverse mortgage can be used to pay off the current mortgage, eliminating the monthly mortgage payment, and freeing up money for other
PRO: Proceeds are tax-free
The IRS considers proceeds from a reverse mortgage to be a loan, not income, so you won’t pay taxes on it.
CON: Loan Costs
Obtaining a reverse mortgage includes loan fees, possibly mortgage insurance premiums, and interest charges, which are not tax-deductible.
CON: It’s not a good short-term option
Upfront costs for reverse mortgages are higher than other forms of borrowing, in part due to the federal mortgage insurance premiums. Alternative short-term financing options include credit cards, personal loans, and home equity loans.
CON: A default could result in losing the home
A default occurs when the borrower fails to meet the ongoing requirements of a loan, such as not paying property taxes or homeowners insurance, or failing to
certify that the home is their principal residence. This can lead to eviction and foreclosure, if unresolved.
CON: Heirs may not be able to keep the home
With a Home Equity Conversion Mortgage (HECM), which is insured by the US Federal Government, heirs have to pay either the full loan balance or 95% of the home’s appraised value, whichever is less. They can do this by paying cash, getting financing, selling the home or turning the home over to the lender to satisfy the debt.
Is a reverse mortgage worth it?
A reverse mortgage could be a good solution if:
• There is a long-term need for additional income, and benefits such as Medicare and Social Security have already been utilized.
• The need to use the equity in the home for income now outweighs the risk that family heirs may not be able to keep the home in the future.
Give one our agents a call to discuss other options such as moving to a less-expensive home, or to locate a reverse mortgage lender!