A reverse mortgage is a loan, and as with any loan, there are benefits, and there can be downsides. Here, we will address some of the pros and cons of reverse mortgages for qualifying individuals aged 62 and older.
The reverse mortgage is a home loan that allows qualifying borrowers to borrow against their home equity. Most reverse mortgages are Home Equity Conversion Mortgages, meaning the Federal Housing Administration (FHA) insures the loan, providing some guarantees to both the lender and homeowner.
First, the Upsides:
A reverse mortgage can offer many benefits to senior borrowers. For an individual or a couple that needs to make home modifications for aging in place, for example, a reverse mortgage can help pay for improvements. A reverse mortgage can provide financial flexibility and freedom during retirement because the loan proceeds can be spent as the borrower chooses.
A reverse mortgage can even be used to purchase a new home through a specific type of reverse mortgage for a purchase transaction. Some borrowers use their reverse mortgage proceeds to pay for in-home care costs or to help reduce the caregiver burden shouldered by children or other family members.
Others use the proceeds for a rainy day or an unforeseen health event.
HECM borrowers must pay insurance premiums associated with the loan. As a result, FHA insurance provides some important borrower protections:
- Protections for some spouses of reverse mortgage borrowers.
- The guarantee that a borrower and their heirs will never owe more to repay the loan than the home is worth at the time of sale.
- The borrower will receive loan payments as agreed upon under the loan terms when borrowers choose to receive monthly payments.
Reverse mortgage requirements:
- A borrower must be a minimum of 62 years old.
- Home equity must be sufficient to qualify (the percentage depends mainly on the youngest borrower’s age; see our calculator for results).
- The borrower must maintain homeowner’s insurance and property tax payments and keep the home to FHA standards.
Weighing the downsides
Like any mortgage, a reverse mortgage carries fixed costs, such as closing costs and other fees. Reverse mortgages also require an upfront insurance premium and an annual renewal.
Some critics of reverse mortgages consider the costs to be a downside. Still, it is important to compare those costs with the alternatives, such as those that come with insurance products and other types of loans that may be available.
Costs Continue to be the Reverse Mortgage Downside:
- Fees — Reverse mortgages have closing costs, like any mortgage
- Insurance premiums — FHA insurance is paid upfront and annually. It may help to compare the costs of reverse mortgage insurance versus other insurance products or options you might be considering.
- Projected equity over time and inheritance for heirs — a reverse mortgage will affect available equity over time.
Another detriment is potentially drawing down home equity. If you intend to leave your heirs a home that is paid off in full, then a reverse mortgage may not be the best course of action. However, it’s important to note that any remaining equity left after the loan is paid off still belongs to the borrower or their heirs. Like any other loan, the balance is paid, and the property or equity belongs to the borrower or heir(s).
A reverse mortgage can be prudent, but the downsides should be considered. There may be a worthwhile alternative for prospective borrowers who plan to move within several years, as reverse mortgages are designed to help people who plan to remain in their homes.
What is the downside of a reverse mortgage?
Is a reverse mortgage ever a good idea?
Can you lose your house with a reverse mortgage?
As with any mortgage, there is a loan agreement that you must adhere to. Reverse mortgage underwriting guidelines require that the borrower pay property charges on time, maintain the property, and occupy their home as a primary residence. If you fail to do so, the loan servicer may call the loan due and payable and force the borrower to refinance or sell the home. Suppose your loan balance exceeds the current property value at default. In that case, you may lose your home to foreclosure and have no equity remaining, so it is important to keep up with the loan commitments, as you can remain in the home for life regardless of the value as long as you continue to meet the loan terms. As with any financial product, you should seek counsel from your trusted advisor, and careful consideration and suitability should be discussed.
What happens to a reverse mortgage when you die?
Is a reverse mortgage a scam?
- Reverse mortgages allow borrowers to tap into their home as non-recourse loans.
- These loans can offer senior borrowers financial benefits, offering increased cash flow during retirement.
- Reverse mortgages carry risks and potential downsides; therefore, upfront research can help determine whether a reverse mortgage fits your situation.
Where to learn more?
For anyone considering a reverse mortgage, it’s a good idea to consult a trusted advisor. An excellent place to start is looking at a simple reverse mortgage calculator to get an idea of the amount you can borrow. Consult ARLO, the All Reverse Loan Optimizer, to help gather some loan options available today.