Beware of a FREE Lunch: Reverse Mortgage Pros and Cons

There’s no such thing as a free lunch, right? While that may be true, there are some ways to get a little extra bang for your buck—and that can apply directly in the case of your home equity.

reverse mortgage

Should you beware of the free lunch? It might have strings attached, it can still be pretty delicious!

If you’re like at least half of Americans, the majority of your wealth is being stored up in your single largest asset: your home. If you’re approaching retirement age, chances are you’ve been steadily paying for your home over the years; and you may even own your home now free and clear.

The mortgage is one of the most common loans people take out in their lifetimes and it allows you to purchase a home when you don’t have the purchase price in cash. Of course, borrowing the money for the home comes with a cost: interest.

So where do you get more bang for your buck? Just like you can borrow funds to buy a home in the first place, you can also borrow those funds back from the home, essentially allowing you to keep your home and access the equity at the same time. You can do this through a reverse mortgage.

Reverse mortgage basics

A reverse mortgage is a home loan that typically allows people who are 62 and older to borrow against the home equity they have built up over time. In order to qualify, borrowers must have enough home equity, and must meet a set of financial criteria to ensure they are creditworthy, just as in a “forward” or traditional mortgage loan.

The borrower can then receive his or her home equity in the form of payments—lump sum or ongoing term or tenure payments—or as a line of credit. The loan does not need to be repaid until the borrower passes away or moves from the home, at which point the borrower and his or her heirs can sell the home to repay the loan, or can repay it through other means. Even if the home’s value does not cover the loan amount, if the reverse mortgage is a Home Equity Conversion Mortgage insured by the Federal Housing Administration, the borrower will not have to repay more than the home is worth.

Just as with any home loan, the borrower must maintain payment of property tax, homeowners insurance, and must keep the home up to FHA standards.

More bang for your buck: Reverse mortgage pros

Like any mortgage, a reverse mortgage gives you two benefits for the price of one. You can eliminate your monthly mortgage payments, receive cash instead, and you still get to live in and maintain ownership of your home. You may even use the reverse mortgage proceeds to complete home improvements or repairs that you have been putting off.

This loan can give you peace of mind, while maintaining the home you have lived in for years, perhaps where you have raised your family and laid roots in your community.

A reverse mortgage taken as a line of credit can also eliminate your mortgage payment and offer a rainy day fund, taken only as needed, that can serve as a source of cash flow to allow for other investments to continue to grow over time.

Many financial planners today are suggesting this benefit to their clients as a way to help them better position their finances in preparation for retirement.

The government guarantee that insures HECM reverse mortgages is yet another benefit: it means the borrower, and his or her heirs will never have to repay more than the home is worth.

No free lunch: Reverse mortgage cons

By no means is a reverse mortgage a “free lunch.” It’s a loan, and just like any other loan, there are costs.

That costs include:

  • Interest, which must be paid when the loan becomes due and payable
  • One-time upfront fees such as closing costs, origination fee paid to the loan originator, and an upfront mortgage insurance premium.
  • Ongoing home maintenance costs, as well as homeowners insurance and property tax.

A reverse mortgage is a loan, and it’s not for everyone. If you don’t plan to stay in your home, or you are using the reverse mortgage as a last resort, talk with a financial advisor who can tell you about your other options. If you would like to learn more about how a reverse mortgage can help in your financial situation, use a reverse mortgage calculator today.

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