Pros and Cons of Reverse Mortgage Loans
Reverse mortgage loans are being touted as the ideal solution for older homeowners who may need extra income during their retirement years. On the surface, reverse mortgages seem to have no down sides. The homeowner receives a monthly payment from the bank, which allows them to remain in their home and pay expenses. There are no payments due as long as the homeowner remains in the home, at which time the loan is due and can be repaid by selling the home. A reverse mortgage loan agreement can seem like a godsend, but there are both pros and cons to reverse mortgage loans. A wise homeowner will do well to examine them carefully.
What is a reverse mortgage loan?
A reverse mortgage loan is a home loan that is paid out in monthly installments to the homeowner. No payments are due on the loan as long as the homeowner continues to live in the home as their primary residence.
What are the requirements for getting a reverse mortgage loan?
One of the earliest reverse home mortgages was created by the Federal Housing Administration (FHA). Since then, there have been specific requirements set up to qualify for a Home Equity Conversion Mortgage, more commonly called a reverse mortgage. In order to qualify for a reverse mortgage through the FHA:
- you must be at least sixty two years of age
- you must either own your home outright, or have a small amount remaining on your mortgage that can be paid off with the proceeds of the reverse mortgage
- you must live in the home
- the home must be either a single family home or a 1-4 unit multi-family home, with the owner occupying one of the units
- condominiums and manufactured homes that meet FHA standards may also qualify
- the homeowner must speak with an HUD-approved counselor before signing a reverse mortgage loan
What are the pros of a reverse mortgage loan?
Because reverse mortgages are designed to benefit seniors who want to remain in their homes, there are some very important benefits to a reverse mortgage. They include:
- There are no income requirements to qualify for a reverse mortgage loan, so it is easy to qualify for one.
- There are no payments due on the reverse mortgage as long as the homeowner continues to use that home as their primary residence.
- You can never owe more than the value of your home at the time that you (or your heirs) sell the home, even if the lending company has paid out more than the home is worth at sale time.
- You can choose one of several options to receive your loan, which makes it one of the most flexible home loans available.
- The reverse mortgage loan does not come due until the borrower (or borrowers, if there is more than one) dies, sells the home, or moves out of the home. At that point, the mortgage comes due in full.
- The homeowner can not be evicted from his or her home as long as insurance and taxes are kept current.
What are the cons of a reverse mortgage loan?
While reverse mortgages have many benefits, it is also crucial to look at their potential negatives. They include:
- Closing costs on a reverse mortgage loan can sometimes be twice as high as closing costs on a regular mortgage.
- If there is an outstanding mortgage or home loan, it must be paid off with proceeds from the loan at closing. Thus, if you can borrow $100,000, but have a $10,000 outstanding mortgage, you will need to take at least $10,000 in a lump sum payment to pay that off.
- The proceeds of the loan, whether in a lump sum payment or in monthly payments, may affect your eligibility for Medicaid or other state or federal aid payments.
- Your loan will come due when you no longer occupy it as your primary residence. At that point, you or your heirs will need to sell the house to repay any money that has been paid out. If you want your home to remain in the family, a reverse mortgage may not be the best plan for you.
Deciding whether or not to take out a reverse mortgage against your home is a complex decision with many pros and cons. The FHA requires that those considering reverse mortgages sit down with a home loan counselor and discuss all the ins and outs of the process. Take full advantage of the requirement to explore all the pros and cons of taking out a reverse mortgage so that you can make the best decision for your financial circumstances.
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