Reverse Mortgages are when a property owner 62 or older borrows against their home’s equity to bring cash or a line of credit from a lender. Unlike a traditional mortgage, they only need to repay once the last surviving homeowner moves out of the residence or dies. Interest and fees associated with the loan get rolled into the balance each month, which means the amount owed increases while the equity in the home decreases. Knowing this, evaluate the pros and cons of reverse mortgages before signing on the dotted line.

What are the pros of a reverse mortgage?

1. Homeowners keep the title of their home the whole time and do not need to make loan payments.
2. For homes viewed solely as an asset, reverse mortgages are ideal for retirees who don’t have a lot of cash savings or investments but have a lot of wealth from the home equity. Cashing out the equity can cover retirement expenses.
3. A person can stay in their home. Applicants do not have to sell their homes to get the cash. They don’t have to worry about downsizing or getting priced out of their neighborhood by moving.
4. Unlike distributions from an IRA or 401(k), money received from a reverse mortgage is considered a loan advancement rather than income. Therefore, no tax liability.
5. The loan balance is protected when the housing market fluctuates. If the home’s value decreases and the reverse mortgage loan balance increases, heirs do not have to worry about paying the balance.

What are the cons of a reverse mortgage?

After hearing all the great things about a reverse mortgage, you must consider the risks.

1. To qualify, applicants must be 62 or older and own their home outright or have at least roughly 50% equity. Additional qualifications include the borrower’s age, payment plan, and interest rates.
2. Homes with sentimental value, such as generational homes, may not be a good candidate.
3. Homeowners must meet Federal Housing Administration requirements, including the financial and physical needs of the house. Therefore, homeowners must stay current on property taxes, insurance, HOA dues, and home maintenance. If, at any point, a homeowner becomes delinquent on the home’s expenses or does not maintain the property, then the lender may default on the loan and lose the house to foreclosure.
4. Applicants are required to live in their house most of the year. Under reverse mortgage rules, if an applicant resides in a nursing home or assisted living facility because of medical reasons for more than 12 consecutive months, it is considered a permanent move. Meaning, the lender may say the loan is due and payable immediately, which might lead to foreclosure.
5. Roommates, not co-borrowers on the reverse mortgage, must be prepared to move out immediately once the last surviving homeowner moves out for over a year or dies.
6. Homeowners need to consider health factors because if one’s health declines to a point they must relocate, the primary residence rule may trigger. Contemplating the short-term gratification of staying home may overshadow the upfront costs.

What is the financial impact?

1. Reverse mortgages can be expensive. Homeowners must pay an upfront insurance premium, generally 2% of the appraised value. In addition, homeowners have to pay origination fees at closing. Applicants can roll these fees into their loan, but that reduces the credit line.
2. Reverse mortgages could negatively impact individuals qualifying for need-based government programs such as Medicaid or Supplemental Security Income (SSI). It is best to speak with a benefits specialist to ensure eligibility.
3. Reverse Mortgages leave less inheritance for your heirs since it reduces the equity left in the house. Within six months of the applicant(s) vacating the home, heirs must pay the entire loan balance or 95% of the appraised value, whichever is less. Unless the heirs can pay the loan outright, they will need to sell the house to pay back the loan.

In conclusion

Reverse mortgages are complicated. Understanding the rules and caveats is essential. These loans come with risks, so weighing the risk versus needing cash is best. Speak with an accountant, financial advisor, or HUD-approved reverse mortgage counselor to discuss implications and alternatives.

STAGES is here to let you know your options.