Reverse Mortgage Pros and Cons
The real estate mortgage loan industry can often be confusing to many individuals. There are many types of programs available to choose from. One of the most confusing loan programs available is the HECM loan or as it is commonly referred to, the reverse mortgage loan. And someone considering this type of financing, he/she must first weigh the various reverse mortgage pros and cons. This can help that individual determine if this type of loan is right for them.
For many people, the reverse mortgage pros and cons are often the same. However, due to the individual circumstance, some items will weigh more heavily than others. It is often a wise idea to write the reverse mortgages pros and cons down on a piece of paper. This will help the individuals decide which side weighs more heavily for their situation.
Often the reverse mortgages pros and cons include a variety of items. These items include the age of the potential borrower, the amount of equity in the residence being used, and the interest rate that will be used. The benefits and disadvantages of a fixed rate, or adjustable rate, loan will also need to be determined in this list of reverse mortgages pros and cons. The length of the term loan will also be an important factor in reverse mortgages pros and cons. Some of these items could be considered a pro, or a con, depending on the terms of the individual loan being considered.
It is often a good idea to discuss reverse mortgages pros and cons with a professional lender. These professionals will be able to help decide which of the reverse mortgages pros and cons weigh the most for the individual. These individuals can also help the potential borrower identify any reverse mortgages pros and cons they had not previously considered.
Pros and Cons of Reverse Mortgages
Pros of Reverse Mortgages
Access to Money for Personal Uses
Unlike traditional bank loans that may be earmarked for specific purposes, reverse mortgages allow people to use their cash in any manner they see fit. Seniors who are approved for this type of mortgage can use the money from the loan to pay unexpected expenses like medical bills or car repairs; they can also put the money to supplement their pensions or Social Security payments. They will not be required to account for the way they spend their money, but rather will have the freedom to use their cash for whatever purpose.
Because a reverse mortgage is viewed as a loan, the money generated from this financing cannot be taxed. The IRS does not consider the cash as income, which lets people escape having to pay taxes on it or even declare it on their tax returns. This benefit will spare people who already must pay hefty amounts to the government each year in taxes.
No Social Security or Medicare Implications
In many instances, people who take out a reverse mortgage can still receive their Social Security payments each month and remain eligible for Medicare. The Social Security Administration typically does not view the loan as a type of income and will not penalize recipients by reducing their Social Security monthly payments or revoking their access to Medicare coverage. This advantage can greatly help people who do not have access to private health insurance or a 401k retirement account.
No Payments Until After Death
Given the nature of this loan, applicants generally do not have to make any payments on their reverse mortgages. The loan does not come due until after the loan holder dies. This benefit lets seniors live their lives without fearing that their incomes will be garnished or their assets and bank accounts seized to satisfy the loan. It also frees up their income that otherwise could have been tied up with expensive loan payments.
Equity Overages Go to Kin
After the loan holder dies, his or her house is sold to satisfy the terms of the loan. However, if the house is sold for more than the amount of the loan, the overage amount can be passed along directly to the person’s benefactor. The mortgage company will not claim that extra amount of money, but rather give it to the loan holder’s next of kin or person listed as the benefactor of the estate.
Cons of Reverse Mortgages
While people can reap several unique advantages by taking out a reverse mortgage, they also would fare well to heed the disadvantages that could await them once they are approved for financing. Before they sign the paperwork and agree to undertake one of these loans, they should take into consideration these arguable detriments to reverse mortgages:
Reverse Mortgages Typically Have High Fees and Closing Costs
As banks and credit unions lower their closing costs and loan processing fees, companies that offer reverse mortgages continue to raise these expenses. Indeed, people who are interested in one of these loans typically face paying more than 20 percent in closing costs, along with processing fees, before they are given access to their money. These expenses are generally required up front and cannot be deducted from the loan’s principle.
Required Debt Counseling
Along with a fair amount of paperwork to fill out, applicants may also be required to go through debt counseling before they are approved. People who expect the process of applying and being approved for their loan often are disappointed and frustrated to learn that they must take a class on managing debt prior to their paperwork ever being reviewed by their lender.
Higher Interest Rates
The low home mortgage rates lauded by the banking industry generally do not apply to reverse mortgages. In fact, people who take out this line of financing generally accrue higher interest rates, reducing the likelihood that there will be overage equity when their homes are finally sold. People who anticipate passing along extra equity to their heirs may be disappointed when they realize that the overage will be taken over by the loan’s high interest rate.
Tax and Homeowner’s Insurance Requirements
People who are approved for financing are required to keep paying the taxes on their homes and also keep up their homeowner’s insurance policies. The lender will not assume the taxes that are due each year, nor will the company include homeowner’s insurance in the loan’s principle. If paying these expenses already proves to be a burden, seniors will not find relief from these obligations by taking out a reverse mortgage.
No Access to Equity
When they take out one of these mortgages, people will give up their ability to access the equity in their homes. They cannot apply for or receive an equity loan from another lender while they are under contract with the reverse mortgage company. If they need additional cash and had planned to take out a loan against the added value in their homes, people will be prohibited from doing so per the terms of their mortgage.
No Home to Will to Heirs
Just as they cannot take out another home equity loan, people with this financing also cannot will their homes to their next of kin. Their homes will be sold by the mortgage lender and thus is not eligible to be willed or passed on to anyone else. People who take out reverse mortgages will lose property that perhaps has been in their family for generations.
Because people are living longer, many senior citizens find that they are not quite prepared for their retirements as they originally may have thought. As they face many years of life after they leave the professional arena, seniors might realize that they do not have enough money stockpiled in their 401k accounts, their savings accounts, investments, and other cash reserves. The thought of having to live without enough money and having to go back to work can be galling for many retired individuals. Rather than go back to work or put off retirement after the age of 62, people can instead take out a reverse mortgage against the equity in their homes. Before they do so, however, seniors would do well to learn about the pros and cons of this type of financing. Knowing these facts can help them make informed financial decisions regarding their homes and their futures.
Additional Reverse Mortgage Cons
The Reverse Mortgage Is a Loan
When people are introduced to the concept of the reverse mortgage, they do not always understand one of the first reverse mortgage cons is that the money they receive must be repaid. If they pass away, it will be left to their heirs to satisfy this debt, and they will be the ones to consider this to be the worst of the reverse mortgage cons.
The Reduction of Equity
The second of the reverse mortgage cons is the fact that it reduces the homeowners’ equity. They will also need to pay interest on the amount they borrow and this adds to the already many reverse mortgage cons.
The Reverse Mortgage Can Be Costly
The third of the reverse mortgage cons is the actual cost of obtaining these loans. This is one of the most important of the reverse mortgage cons because reverse mortgages are very risky for lenders. For this reason, they need to charge a high interest rate and may even charge higher closing costs to make this a very appropriate addition to the reverse mortgage cons. This one of the reverse mortgage cons will be a highly important reason seniors will want to proceed cautiously before obtaining this type of loan.
Reverse Mortgage Lenders Are Not Always Trustworthy
The fourth of the reverse mortgage cons is the fact that people cannot always receive a straight answer when they ask a question. If homeowners make a bad deal with someone who was less than truthful with them, it will make the fact that they contracted with the wrong lender one of the reverse mortgage cons that they regret the most.
Additional Reverse Mortgage Pros
A reverse mortgage is another way that you can get some money from your own home. In the past, you had to sell your house or use it as collateral for a loan which had to be repaid in monthly installments.
Reversed mortgages, on the other hand, is a type of mortgage where the loan amount is not repaid as long as the homeowner is still living inside the house. The loan is only repaid when the borrowers dies or permanently moves out of the house, or if the house is sold. The lender pays out the loan in three ways: lump sum, monthly payouts, or line of credit. This in reality is a great pro and benefit for the elderly.
There are actually three types of reverse mortgages: (the least expensive) single purpose reverse mortgage, HECM or Home Equity Conversion Mortgages, and private proprietary reverse mortgages. The most popular programs are the HECM loans that are backed by HUD with FHA mortgage insurance.
Single purpose loans are the cheapest, but you can only use them for only one purpose, that can be either home repair or for paying off property taxes. If you seek low-cost mortgages that you can use for different purposes, HECMs are some of the least expensive ones you can find, partly because the american government insures them. Low prices on HECM programs can be added to the list of pros and benefits.
Reverse mortgages are a lot like wine: the older, you are the better. The older you are, the more money you can get. Seniors must be at least 62 years old and must own their home. Eligible homes in this case include single detached homes as well as HUD-approved condominiums and dwellings. Trailer homes do not qualify.