Reverse mortgages are loans that allow homeowners who are at least 62 years old to access cash from their home equity. While home equity loans are commonplace, reverse mortgages offer some distinct advantages over traditional equity loan products. Depending on individual and family factors, a reverse mortgage can be a useful financial tool for seniors.
Pros of Reverse Mortgages
During retirement, many baby boomers find themselves trying to get by on less income than they did during their working years. Accessing home equity via a reverse mortgage loan provides a much-needed option that bypasses the typical income and debt-to-income ratios that can make it difficult for retirees to qualify for traditional loans. Boomers can use this asset to supplement their income for a better quality of life during their golden years.
Another attractive benefit of getting a reverse mortgage is that the funds provided are not taxable. When you compare your nontaxable funds from your mortgage equity with taxable income from other sources, it is easy to understand one of the reasons reverse mortgages are a preferred source of cash. Tax laws are complicated and change on a regular basis, so it is always advisable to consult with a tax professional about the tax implications of a reverse mortgage.
Reverse mortgage borrowers are also protected against a growing mortgage balance, relying solely on their home equity as collateral. Borrowers and their heirs never owe more money than can be paid off with the home. The lender can’t make claims against other assets.
Yet another benefit of this mortgage product is that the heirs have more options than they typically have when inheriting a home. For example, if the debt on a home is greater than the property value, the heirs can easily satisfy the loan by simply returning the title to the lender. Because reverse mortgage loans are insured by FHA in most cases, any unpaid balance due to the lender will be paid by insurance.
Possibly one of the most favorable benefits of a reverse mortgage loan is the fact that the borrower receives a predetermined amount of cash but does not have to make any loan payment to the bank. A reverse mortgage loan is only repaid when the home is sold or the borrower moves out of the house. Also, in the event the owner passes away, then the debt will be paid off in full using the home equity.
As if the benefits above aren’t enough, it is noteworthy that the loan disbursements are made based on what the borrower needs to meet retirement goals. The cash can be dispersed in a lump sum, in predetermined payments over time, or as a credit line that can be used on an as-needed basis.
Unlike most loans, the borrower can spend the money any way they want. This unique feature of a reverse mortgage is a nice change from how most loans are structured with strict rules about how the money can be used.
Cons of Reverse Mortgages
While the good news about reverse mortgages is impressive, this type of loan is not perfect for everyone. There are some drawbacks.
A reverse mortgage comes at a cost. There are closing costs, lender fees, and FHA insurance that must be paid. While the costs are added to the loan balance so there are no upfront charges, the loan expenses do effectively diminish the equity available.
Borrowers who prefer fixed-rate loans may also be disappointed with the terms available on their reverse mortgage. Fixed-rate loans are only available for lower loan amounts. For larger loans, adjustable-rate mortgages are the only option offered. The uncertainty that this fact introduces into the loan terms does turn off some borrowers who are risk-averse.
Granted, there are no loan payments due, but that does not mean that borrowers don’t have responsibilities they must meet to satisfy the terms of the mortgage. Baby boomers can have their homes foreclosed on if they fail to pay homeowner’s insurance, property taxes, or HOA dues.
Another important consideration that can cause problems is that the borrower must agree to reside in the home permanently. The uncertainty of the aging process makes it difficult to know exactly what to expect in terms of health needs. If the borrower is forced to go into a long-term care facility, for example, would the lenders view that as a default on the loan agreement? Divorces and marriages can also create problems.
Conclusion
Reverse mortgages provide cash benefits to baby boomers who are at least 62 years old. There are pros and cons that must be considered. Like any financial decision, it is always prudent to discuss the details with a trusted financial advisor before signing the dotted line.
This article was contributed to Leisure Freak from Boomer Buyer Guides.
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Baby Boomers themselves, David and Alice Goldstein founded BoomerBuyerGuides.com a few years into their own semi-retirement. They publish articles that focus on the practical needs of Baby Boomers born between 1946 and 1964.