You've probably seen the TV commercials and heard the radio ads about reverse mortgages. They are the ones that make seniors the promise of being able to afford to stay in their homes or to have greater financial freedom with money borrowed against the equity built up in their homes. Reverse mortgages are an interesting lending concept, and they make sense for some people. However, just like any other mortgage product, there are pros and cons. What works for others may not be the best option for you. As always, our advice is to speak with a qualified mortgage professional who can help you decide.
Qualifying for a Reverse Mortgage
Reverse mortgages allow you to borrow back some of the equity that you have built up in your home. Essentially, the bank advances you the money and charges you interest on it. In order to qualify for such an arrangement, all of the owners of the home need to be at least 55 years of age, and you need to own the home outright. You won't qualify for a reverse mortgage (also called a home equity conversion mortgage, or HECM) if there are other outstanding loans or liens on the property. The other qualifying condition is that the home must be your principal residence, meaning that you live there for at least 6 months of the year.
Here's Why People Like Reverse Mortgages
When they retire, it is not uncommon for seniors to find themselves in a financial situation where the majority of their net worth is locked up in their homes while their incomes have decreased substantially. Reverse mortgages offer the opportunity to unlock some of that equity so that they can enjoy it without having to sell their home. The benefits of a reverse mortgage include:
- No payments on the loan are required until you are no longer living in the home.
- No need to downsize or give up ownership of your home.
- The money you borrow is not taxable.
- The money you receive does not affect your government income or supplements.
- Your home can continue to increase in value throughout the life of the mortgage.
Some People Think it's Too Good to Be True
Access to extra, tax-free money with no loan payments while your home continues to appreciate? That does seem too good to be true. It's not. However, there are also some downsides we haven't yet discussed.
Eventually, that money needs to be repaid. When you sell the home or pass on, either you will use the proceeds of the sale to settle the loan, or your estate will be required to pay back the mortgage amount and the accrued interest.
- The home must be kept in good condition so as to retain its value.
- You must remain in good standing with property taxes, insurance and maintenance fees.
- Estates typically take months to settle, but the reverse mortgage may be due earlier.
- Interest rates are typically higher than for most other types of mortgages.
- Interest on the loan eats away at the equity you hold in your home, meaning less to pass on to your heirs.
- Even if they want to keep it, your heirs may be forced to sell the home to repay the debt.
- If the value of the home decreases, you lose even more of your equity.
- Costs of setting up and discharging a reverse mortgage may be higher than other credit options.
Reverse mortgages may sound like a good idea, but they aren't for everyone. While the prospect of leveraging your own equity for some extra cash is a good one, there are several reasons why you would want to consider an alternative to a HECM. Talk to a mortgage broker explain the pros and cons of reverse mortgages. They can help you learn about other borrowing options you can explore, including home equity lines of credit (HELOC), to make an informed choice.