Pros and Cons of Reverse Mortgage

Pros of Reverse Mortgages

  • Allows the homeowner to stay in the home.
  • Can pay off existing mortgages on the home.
  • Simple to qualify for because no minimum credit score and generally no income requirements.
  • No monthly mortgage payments are required, however the homeowner must live in the home as their primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements.
  • The homeowner receives payments on flexible terms:
    • Credit line for emergencies
    • Monthly payments
    • Lump sum distribution
    • Any combination of the above
  • A reverse mortgage can not get “upside down” so the heirs will never be personally liable for more than the home is sold for.
  • Heirs inherit the home and keep any remaining equity after the balance of the reverse mortgage is paid off.
  • Loan proceeds are not taxable.
  • The interest rate may be lower than traditional mortgages and home equity loans.
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Reverse Mortgage Cons

  • The fees on a reverse mortgage are the same as a traditional Federal Housing Administration (FHA) mortgage but are higher than a conventional mortgage because of the insurance cost. The largest costs are:
    • FHA mortgage insurance
    • Origination fee
  • The loan balance gets larger over time and the value of the estate/inheritance may decrease over time.
  • Although Social Security and Medicare are not affected, Medicaid and other need-based government assistance can be affected if too many funds are withdrawn (and not spent) in one month.
  • The program is not well understood by most individuals. However, the availability of independent reverse mortgage counseling helps.