Reverse mortgages are financial tools that are sometimes considered by baby boomers during their retirement years. However, before you make the choice to get a reverse mortgage it’s critical to understand their pros and cons.
These mortgages can provide more money in retirement and offer financial flexibility, but they can also come with complexities and problems. That’s especially true in regard to potential loopholes, so recognizing that risk and carefully examining what you’re agreeing to is key.
You don’t want to end up with a reverse mortgage balance that’s higher than you expected or put your house at risk, even to get a lump sum of money or monthly payments you can use for other things. Choosing the right loan servicer and type of reverse mortgage matters. Here’s what to consider, so you can decide if a reverse mortgage makes sense for you.
What Is a Reverse Mortgage and How Does It Work?
A reverse mortgage is exactly what it sounds like. You would take out a mortgage on your home, but instead of making payments to the mortgage company, the company makes payments to you in return for an interest in your home.
The eligibility criteria for a reverse mortgage is important to understand since not every homeowner will qualify. First, you need to be at least 62 years of age. If more than one person owns the home, at least one of the owners has to live in the home for the majority of the year.
You can access your funds through a lump sum payment, monthly payments, or as a line of credit. Depending on the company you use for the reverse mortgage you may have several options for getting the money or those options may be more limited.
Repayment is one of the biggest questions many people have when they think about borrowing money through a reverse mortgage. For most reverse mortgages the financial implications are only significant if you permanently move away, die, or sell your home. When one of those events occurs the loan and interest need to be repaid.
A reverse mortgage and a traditional home loan are not the same. This is true for comparing reverse mortgage options to a home equity line, as well, because there are unique features and benefits of reverse mortgages for retirees.
These include having an equity line of credit to draw on or a lump sum of money to use without the need for monthly repayment and the opportunity to stay in your home. Senior homeowners who don’t have heirs to live their property to may be especially interested in a reverse mortgage because having the loan amount repaid when they die won’t negatively affect someone they might otherwise leave their estate to.
There are two main types of reverse mortgage options. The standard reverse mortgage, which is described above, and home equity conversion mortgages (HECM), which come from a government program. These are offered through HUD (Housing and Urban Development), and insured by the FHA (Federal Housing Administration).
This program requires a counseling session and is federally backed, which makes it a safer option for seniors than a reverse mortgage from a private lender. However, if you own your home outright and do your due diligence, either type of reverse mortgage can be a good opportunity to have additional cash in your later years.
When Reverse Mortgages Make Sense for Boomers
There are some specific scenarios where reverse mortgages can provide significant benefits for baby boomers. For example, they can be very valuable for supplementing retirement income, and can help cover expenses related to a nursing home or other care.
Some seniors also use reverse mortgage funds to travel or simply to live off of if they aren’t getting enough retirement benefits to afford their bills and other needs. By choosing a reverse mortgage they can receive monthly payments or put a lump sum in the bank. Alternatively, they may have a credit line to draw on only when they need it, which can increase peace of mind.
Many seniors use the loan proceeds from a reverse mortgage for funding home repairs or making upgrades that can increase their home equity, too. That’s very important, since repairs, property taxes, homeowners insurance, and other costs of owning a home all still have to be paid.
Covering unexpected healthcare costs for an assisted living facility or other medical needs can be easier when you can borrow money against your home. A home equity loan through a reverse mortgage is not income, so it isn’t taxed as income. That can protect some Medicare benefits and Medicaid eligibility for borrowers.
However, it’s important to talk with a tax advisor or other financial professional to ensure you won’t end up losing benefits due to the money received from a reverse mortgage balance. Understanding how reverse mortgages work is extremely important when you need to make an informed choice about your finances, especially if taking out a reverse mortgage might affect need-based government programs or other retirement benefits.
Allowing retirees to stay in their homes while converting equity into cash is another big benefit of most reverse mortgages. You can use the loan funds for all kinds of things, and when you have extra cash flow along with other retirement income you have options you wouldn’t have on a more fixed income.
To understand the reverse mortgage pros and cons, what kind of loan amount you can expect, and find private lenders, you should get matched with a financial advisor. They can answer your questions and help you decide if leveraging your primary residence to access cash is the right choice for your needs.
When Reverse Mortgages May Not Be Ideal
While many seniors love what a reverse mortgage can offer, there are some reverse mortgage cons that need to be considered. A few loopholes could make these kinds of mortgages more expensive than expected and potentially create additional costs or a significant loss of equity. Here are a few of the biggest reasons why a reverse mortgage might not be the right choice for your particular situation.
- High Fees and Costs: Depending on your mortgage lender and what they’re offering you, upfront costs, interest rates, and ongoing fees might outweigh the benefits. If you have a a mortgage insurance premium, for example, because your loan balance is high compared to your home’s appraised value, that can add a lot of money onto the total over time.
- Impact on Your Estate: Using a reverse mortgage reduces your home’s equity, potentially leaving less for your heirs. If you don’t have heirs to inherit from you this might not matter, but if you do they’ll have to repay the loan if they want to keep the home you’ve left to them. That may not be possible if the balance exceeds what they can refinance the home for or there are other extenuating circumstances.
- Eligibility Requirements: It’s important to be aware of restrictions or conditions that could make you ineligible or complicate the process. If you’re 62 or older but have others living with you, for example, that could affect how much you can receive. The value of your home also matters, because you may not be able to borrow as much as you’d like if your home is in a lower price category.
- Home Maintenance: When you have a reverse mortgage there are requirements to maintain your home and pay property taxes and homeowners insurance. These can be difficult to do if you still don’t have a lot of money or if you need the funds from your home equity conversion mortgage to do things like make repairs or pay taxes. If your home falls into disrepair you could also end up unable to make needed updates, which lowers the value of your home and could make you ineligible to borrow additional funds.
The good news is that you don’t have to make a decision on proprietary reverse mortgages, home equity, and other factors on your own. You can get some help and support to get your questions answered and make the right financial choice. Use our free Advisor Match Tool to find a trusted professional and get the knowledge you’re looking for, so you can make an informed choice.
Common Reverse Mortgage Loopholes to Be Aware Of
Because your home equity is so valuable you want to make sure you protect it. If you decide to use it through a reverse mortgage, though, you should know that there are some specific loopholes you need to watch out for.
These can include hidden fees like closing costs and your initial mortgage insurance premium, misunderstandings about how home equity conversion mortgages work and your repayment options, and a potential loss of home ownership. You may also put your government benefits at risk. Here are the biggest loophole issues to look for.
- Hidden Fees: Costs such as origination fees, closing costs, increased homeowners insurance premiums, and mortgage insurance premiums can reduce overall benefits and the amount of money you’ll receive from your reverse mortgage. If you already have an existing mortgage and are trying to borrow from your home’s equity you may not be able to get much after all the fees and other costs are deducted.
- Interest Accumulation: Accrued interest can grow significantly over time and affect your loan balance. Even though you’re not being asked to pay interest outright or make monthly payments, the interest being charged on the reverse mortgage is still adding up. Borrowing against your home isn’t free, even if the payment won’t be collected until years later.
- Impact on Government Benefits: There are potential effects on eligibility for programs like Medicaid or Supplemental Security Income (SSI). That doesn’t necessarily mean you can’t have a reverse mortgage if you have one of these programs, but you want to be very sure about the impact doing so will have on the benefits you rely on. In some cases the money you can access from a reverse mortgage may be counted like income, and that could reduce or eliminate your benefits. This may not be worth it to you.
- Prepayment Penalties: Some reverse mortgage options have prepayment penalties, which add to your costs if you decide to repay the loan early. This type of mortgage basically counts on people not paying their loan balance back early, because that lowers the amount the lender can make. Before you agree to any home equity conversion mortgages or other reverse mortgage options, make sure there isn’t a prepayment penalty in your contract.
Seeking Professional Guidance
Seeking expert advice matters when it comes to reverse mortgages. You need to fully understand the nuances and potential loopholes of this financial option, so you can make a wise choice for your future. If you choose to get a reverse mortgage it should be because you’ve weighed the pros and cons, and are comfortable with the benefits the loan balance will give you.
Before signing on the dotted line for your reverse mortgage, you should reach out to a financial advisor who specializes in retirement planning. When you try to navigate a reverse mortgage without professional guidance it could lead to a lot of missed opportunities or financial setbacks. You want to make sure you can avoid any loopholes, reduce your costs, and protect yourself from the biggest downsides of choosing a reverse mortgage.
The best way to do that is through working with professionals, and you can find a financial advisor who can help you recognize the advantages and disadvantages of the reverse mortgage you’re considering. Not only can that give you a better financial outcome, but it can help you have a lot more peace of mind, as well.
Conclusion
The real value of a reverse mortgage is in finding the one that’s right for your needs. Whether you want to travel, pay outstanding federal debt, need in-home or nursing home care, or plan to make repairs to your home, there are times when a reverse mortgage or secured HECM from Housing and Urban Development can be the best choice.
Professional guidance is crucial, though, to make an informed decision that can bring you security and protection in your later years. That way your financial choices will align with your retirement goals and you can explore options that surpass a regular mortgage and give you freedom to do more in retirement.
The information provided on this site is for informational purposes only and should not be construed as financial advice. Invested Better does not guarantee the accuracy or completeness of the information provided. Please consult with a licensed financial advisor before making any financial decisions.
