A reverse mortgage allows homeowners over the age of 62 to borrow back money from the many years they’ve spent building equity in their homes. It’s a good option for seniors and retirees looking for additional monthly cash flow, as well as for those who need to make significant home improvements, cover healthcare expenses, or downsize by purchasing a smaller house. Best of all, this type of mortgage allows borrowers to continue to own their homes.
Reverse mortgage basics
Reverse mortgages begin with counseling from a financial advisor, as well as a financial assessment which may include a credit check, debt review, and equity analysis. During a reverse mortgage term, the lender makes monthly payments to you, gradually purchasing the equity in your property. And because you still own your home, your title acts as security for the loan. Payment is generally due when the last surviving borrower passes away, when you move from the residence, or when you sell your home.
While reverse mortgages come in different shapes and sizes, the pros and cons tend to be similar. Let’s look at a few of each:
Pros of a reverse mortgage
- You don’t owe a monthly principal or interest payment.
- You can choose to receive payments as a lump sum, a monthly disbursement, a line of credit, or a combination.
- Because you’re not making a monthly payment, you don’t have to meet a minimum income requirement.
- If you outlive your loan, Federal Trade Commission rules keep you from owing more than your home is worth.
- If you have a federally-insured Home Equity Conversion Mortgage, you can live in a nursing home for up to 12 months before the loan is due.
- Proceeds are generally tax-free.
- Reverse mortgage payments don’t affect Social Security or Medicare payments.
Cons of a reverse mortgage
- You’ll have to pay for mandatory mortgage counseling, loan origination fees, closing costs, and sometimes monthly servicing fees.
- Payouts vary depending on the borrower’s age, the home’s appraised value, and interest rates.
- The maximum value that can be used to calculate the reverse mortgage’s value is $625,000, even if the home has a higher appraisal.
- The amount you owe increases over time.
- If you fail to pay taxes, insurance premiums, or keep your home in good condition, your loan may become due.
- Most reverse mortgages are variable-rate, short-term loans.
- You can’t deduct interest from taxes until the loan is paid off.
Deciding whether a reverse mortgage is the right move takes a good amount of planning and research on your part. If you’ve done your homework and prepared for any potential drawbacks, the pros will likely outweigh the cons. For more in-depth requirements and information about reverse mortgages, visit the U.S. Department of Housing and Urban Development’s FAQs page. We also invite you to complete an online application so we can help you determine if a reverse mortgage is right for you.