Getting a Reverse Mortgage: Weighing the Pros and Cons
If you’re 62 years old or above, you may have heard about reverse mortgages – an easy home loan option for seniors. Retirement is one of the most significant milestones of one’s life. It comes with its fair share of financial challenges. That’s precisely why reverse mortgage seems like a lucrative option for you. However, they come with both pros and cons. The loan process is complex, and you should thoroughly research how reverse mortgages work to make an informed decision.
Below, we have listed some common pros and cons of reverse mortgages. Let’s take a look.
Pros of Reverse Mortgage
Getting a reverse mortgage comes with the following benefits.
1. You retain homeownership
The most lucrative benefit of a reverse mortgage is retaining the homeownership during the mortgage period. A reverse mortgage is designed to allow you to stay in your home while you receive monthly payments from the lender. You must meet other obligations like property taxes, associated costs, and insurance. If you pass away, your heirs can pay off the remaining debt or sell the property to pay it off, but the ownership remains with them.
2. You get a supplemental income source.
Retirement can be difficult and can cause a dent in the financial plan of most elderly couples. A reverse mortgage can provide a source of steady supplemental income for you. With this option, you can turn your home equity into liquid cash and get a monthly payment or lump sum. It can be a supplemental income and help you pay living expenses or cover other expenditures.
3. You can age in one place.
As a reverse mortgage doesn’t require you to leave your home or relocate when you take out the mortgage, you can stay in your home indefinitely. This way, you can spend the last few golden years of your life in one place and enjoy the time with your family.
4. You have a better grip on your retirement expenses.
Managing retirement expenses is an exhausting job in itself. With a reverse mortgage, you have a steady supply of fixed income, so you know how much money you receive monthly. This lets you budget more efficiently. Moreover, unlike other traditional mortgages, you don’t have to pay a monthly installment, which reduces your expenses. Again, you can use the mortgage money as an emergency fund, so your regular budget isn’t strained during an emergency.
5. You don’t have to pay taxes on income.
The funds you receive through a reverse mortgage are considered loan proceeds and don’t count as income. That’s why you don’t have to pay income taxes on the reverse mortgage amount. It takes away an unnecessary financial burden from your shoulders, and you can use this money elsewhere.
Cons of Reverse Mortgage
On the flip side, a reverse mortgage comes with the following setbacks.
1. Your heirs might be affected
A reverse mortgage uses up a home’s equity, reducing the home value. The property that you pass to your heirs, thus, might not be as valuable as it was to you. Moreover, if you suddenly pass away without paying the entire loan, your heir has to pay the due. This can also disrupt their financial plan and any plans for the inheritance.
2. Your retirement benefits might be impacted
Getting a reverse mortgage could impact your other benefits. You might be ineligible for SSI (Supplemental Security Income) and Medicaid based on whether the mortgage is an asset or income. You might also become ineligible for state or federal assistance programs, have reduced chances of property tax exemptions, and reduce income tax-related credits and benefits.
3. You are susceptible to foreclosure
Various conditions can trigger a foreclosure, and you or your heir can lose the ownership of the house. You must continue to pay property taxes and insurance, as failing to pay them can lead to foreclosure. You also must live in the home and pay these taxes. If you pass away, and your non-borrower spouse or heir can’t repay the loan within the timeframe, it can lead to foreclosure.
4. You get reduced equity due to associated costs
A reverse mortgage might sound like free money for your home equity. Still, it has many associated costs, which essentially reduces the equity you’re receiving. Loan origination fees, mortgage insurance, closing costs, service fees, and interests are a few costs you must incur. The equity you’re liquidating might need to be more against these costs.
5. You’re in for a complex procedure and long-term commitment
Getting a reverse mortgage is a long-term commitment. You can obtain it after going through many complicated steps and paperwork. You must also abide by the laws and take good care of your house. This can sometimes be exhausting for you.
Getting a reverse mortgage is a partial win-or-lose situation. The losses and benefits can vary from person to person. You can opt for a reverse mortgage if you’re over 62 years old but in good health and have a home with tremendous value. It can add to your supplemental income for years. If you’re retired and self-employed, you can check out loans and mortgage options designed for self-employed people looking to ensure a stable future.