The Pros and Cons of a Reverse Mortgage
We’ve all seen the ads on TV. Our favorite celebrities from the 70s and 80s telling us how reverse mortgages are a great way to add to retirement and eliminate monthly mortgage payments. And for some people, they can be an attractive option to consider depending upon your own personal situation. But they definitely aren’t right for everyone.
A reverse mortgage is actually just a type of loan that allows homeowners to convert or effectively “sell back” a portion of their home’s equity to the bank for cash. Think of it like rolling back the clock on a regular mortgage. You’ll get cash for the value of the equity that you sell back, but you’ll end up owning a smaller percentage of your house. The loan is repaid to the bank when you move out or when your estate is sold by your heirs.
This is different from the equally popular home equity line of credit, in which a borrower would have to make principle and interest payments every month, but they get to keep the equity of their home once the loan is complete.
One of the most important considerations to keep in mind is that you must continue to use the home as your primary residence. These loans are designed to help low-income retirees stay in their homes by using their equity to cover expenses. Sometimes condominiums, townhomes, and even manufactured homes may be eligible for a reverse mortgage.
Pros: A reverse mortgage may be worth considering if the following circumstances apply to you
- You can reasonably expect that you won’t need to move in the foreseeable future;
- You can afford the cost of taxes, utilities, insurance and maintenance;
- You can arrange to keep up with repairs and landscaping;
- You have a significant amount of your mortgage paid off and your home hasn’t lost considerable value in recent years; and
- You need to increase your retirement income or have an immediate need to pay off unexpected debt (but don’t forget to research other types of loans that may be better suited, if the motivation is simply to pay off an unexpected expense.)
Cons: As with any type of financial arrangement, there are several potentially negative considerations to make, including
- You must be the homeowner and must be at least 62 years old;
- You have to own the home completely and have a relatively low balance on your mortgage;
- You have to have enough resources or income (e.g. social security) such that you’ll be able to pay any ongoing costs, which include the property taxes, utilities, HOA fees and home insurance;
- You’ll be required to adequately maintain the home, and will bear the cost of those repairs, including replacing the roof, water heater, heating and A/C systems, appliances, etc., and keep up the landscaping and yard;
- Interest rates on reverse mortgages are typically around 1.0% higher than the rate of a traditional 30-year fixed mortgage, and often are designed with variable interest, meaning that the rate on your loan can climb significantly in a bad economy;
- Closing costs and other fees can be significant, so be sure to get an accurate estimate from your loan officer. Just as there are costs to a regular mortgage, so too will a reverse mortgage come with their own special costs and fees;
- Research current laws regarding reverse mortgages. In October 2017, the government enacted tougher rules for new reverse mortgages with lower limits on the amount that a borrower can draw out;
- Your estate will shrink, since you’re essentially selling off your home equity, so your heirs will inherit less and you’ll have less to leave to charity;
- And the most important thing to keep in mind…. you must live in the home as your primary residence. If you ever move out, such as if you need to go to an Assisted Living Care facility or decide to move in with family, the reverse mortgage will come due, effectively selling the home back to the bank. And if you share your home with others, including a dependent child or a spouse not on the loan, your remaining family may need to sell the house to pay off the balance due.
And don’t forget, by federal law all borrowers have at least three days to cancel a loan if they change their mind. Be sure to go over the paperwork at closing and ask any questions you may have.