The Pros and Cons of a Reverse Mortgage
If you’re nearing retirement or have recently retired, you may be looking for a way to increase your financial stability after this major life change.
One way to get a steady income stream without going back to work is to use a reverse mortgage. Essentially, a reverse mortgage allows you to borrow against your home equity, giving you a line of credit or a steady amount of cash over a long period of time. As with any financial proposition, however, a reverse mortgage certainly isn’t for everyone. Here are some of the different reverse-mortgage pros and cons that can help you decide if getting a reverse mortgage is right for you.
Pro: No Monthly Payments
Unlike more traditional types of loans, a reverse mortgage does not require you to make a monthly payment. This means that you don’t need nearly as much income to qualify for a reverse mortgage program. Since you are borrowing against your home equity, you will still need to maintain your property values with repairs and pay the usual taxes and insurance that come with owning a house, but since these are costs that you would have had to pay anyways there’s a good chance that you will have already factored them into your retirement plan.
Pro: Flexible Funds
Whether you choose to take your reverse mortgage in the form of a lump sum, a line of credit, or monthly payments, or a combination of the various options, the funds that you get are not restricted and can be used for any purpose. They are treated like any other loan, meaning that you won’t have to pay income tax on them, and you won’t have to worry about oversight of the way that you spend your reverse mortgage funds. Some people use reverse mortgages to cover everyday expenses such as groceries and gas, while others use the money to pay for unexpected medical expenses or repairs.
Pro: A Line of Credit for Life
Many other solutions to get seniors a line of credit, such as HELOC, have been known to freeze or cancel on their clients with little to no advance notice. Traditional credit cards may not be attractive to you in your retirement because of the fact that you need the ability to pay the sometimes high minimum every month. With a reverse mortgage, so long as you have equity left to borrow against and keep up with the standard responsibilities of home ownership, you are guaranteed a line of credit for life.
Con: High Initial Cost
Reverse mortgages are unusual in that, while they are incredibly useful for your long-term financial health, there is a relatively high initial cost. Between the various fees throughout the process of signing up for a reverse mortgage, these costs can sometimes mount to around
$6,000. If you are already in dire financial straits, a reverse mortgage may not be the best solution.
Con: May Impact Needs-Based Programs
In the United States, many needs-based programs will punish or drop those who depend on them if they allow funds to accumulate in their accounts. While Social Security is not affected by the accumulation of funds, other programs that you may be counting on are. EBT, Medicare, and disability programs all have maximum amounts that you can have in your account at any time, regardless of how much you depend on those programs for your everyday life. If you are on any of these needs-based programs, care must be taken to only draw the funds you need and be certain to spend them before the month’s end so that they don’t show up on your statements to the program supplying your benefits. If you believe you can keep track, a reverse mortgage can still be viable, but if not the program, sadly, may not fit your needs.
Con: Must Maintain Primary Residence
A reverse mortgage must be taken out on your primary residence, and that property must continue to be your primary residence for however long you keep using the reverse mortgage. This means you cannot move or rent out the property if you want to continue having access to the funds provided by the reverse mortgage. If you choose to move or rent out the property, the loan must be paid off immediately, which can be an enormous financial burden depending on how much you have already used the reverse mortgage.- by Matt Watts