The Pros and Cons of Reverse Mortgages

Reverse mortgages have become a popular retirement strategy in recent years. A reverse mortgage allows homeowners with substantial equity in their home to access lines of credit using their property as collateral.

Property owners aged 62 years or older can apply for reverse mortgages and get a line of credit or cash up to the value of their home. Reverse mortgages can be highly appealing, especially for cash-strapped retirees, as a method to get at some of the equity in their property to support themselves.

Under most circumstances, reverse mortgages require no minimum monthly loan payments. If the loan is not repaid in full by the time of the borrower’s death, the lender may take the home.

Let’s look at some of the major Pros and Cons of taking out a reverse mortgage:

Pros

· Additional money for retirement for borrowers who have insufficient cash reserves to support themselves.

· Allows the recipient to continue living in their home for the remainder of their life.

· Can be obtained even if the house is still subject to a traditional mortgage.

Cons

· Reverse mortgage can only be taken out on your primary residence, and you are still responsible for taxes, insurance, utilities, and your primary mortgage if you have one.

· Reverse mortgages often have higher interest rates than traditional mortgage loans or home equity loans.

· If you are unable to make your payments, or spend too much time away from your home and it is determined to not be your primary residence, the property could be foreclosed on.

· If you are on or will be on Medicaid, remember that large changes in your financial situation can impact your Medicaid eligibility and you should always discuss with your Medicaid attorney before making major financial decisions. · If you have an estate plan, a reverse mortgage could complicate the transfer of your home to your heirs. When you die, your estate will have to pay the remaining balance of the loan before distributing anything to your heirs. With a standard mortgage, your heirs can often just assume your mortgage when they inherit the house. Unlike standard mortgages, reverse mortgages often have “acceleration” clauses that will force your beneficiaries to pay the reverse mortgage off in full within 60 days of your death – either by selling the property or by going into their own pockets if they want to keep the house in the family.

Trevor Funseth