Pros and Cons of a Reverse Mortgage
Retirement Planning March 27, 2018

Pros and Cons of a Reverse Mortgage

Providing funds for your retirement, a reverse mortgage could be one of the most important components of retirement planning. However, it is not the best choice for everyone. It is necessary to understand the pros and cons of a reverse mortgage before you decide to opt for the same.

Here are some of the pros of a reverse mortgage.

  • It is a good loan option for homeowners and homebuyers who are 32 years old and above as it will help them to live more comfortably after retirement.
  • You get to live in your home as well as retain its title.
  • You can also choose to take your funds as a lump sum. It enables you to have a line of credit that you can tap as you need. This gives you a steady stream of monthly advance for a set period.
  • If you have any existing mortgage on your home, the funds from your reverse mortgage can be used for paying the debt. You are not required to make monthly principal and interest payments on the reverse mortgage as there will still be a lien on your home for the outstanding amount of your reverse mortgage. This will free you from the monthly mortgage payment expense.
  • As long as you live in the home and continue meeting necessary obligations like property taxes, homeowner’s insurance, and maintain the property, no monthly mortgage payments are required.
  • Also, out-of-pocket expense is minimal as closing costs and ongoing fees like the Federal Housing Administration (FHA) Mortgage Insurance Premium (MIP) can be backed with a reverse mortgage.
  • Loan proceeds are not even considered as taxable income.
  • Usually, a reverse mortgage doesn’t affect Social Security or your medical benefits. However, you need to consult a financial advisor before being certain about the potential financial implications of opting for a reverse mortgage loan.
  • A reverse mortgage loan is a non-recourse mortgage in nature. This means that neither you nor your heirs are personally liable for any price of the mortgage that exceeds the amount of your home.
  • After the loan is paid, anything that remains belongs to you and your heirs.
  • To access even more loan proceeds, if the value of your home increases in future, you can opt for refinancing your reverse mortgage.

However, reverse mortgage also entails some disadvantages. Here are some of the cons of a reverse mortgage.

  • As interest on the loan and fees accumulates, the loan balance tends to increase over time.
  • Fewer assets are available for your heirs as home equity is used. You can still leave your home to your heirs. However, they will have to pay the remaining balance of the loan. Usually, the loan is paid off by selling the home, but you can opt for other measures to pay the loans as well as refinancing through a traditional mortgage.
  • Fees may be higher than that in case of a traditional mortgage.
  • Benefits for needs-based government programs may be affected.