Reverse mortgages are loans that were created to help home-owning seniors living on a limited income. When you take out a reverse mortgage, the traditional roles of lending have been reversed. In this situation, the “borrower” receives money from the lender. This is done by turning equity in your home into money. You don’t need to repay the lender until you move out of your home. You may be asking yourself whether or not a reverse mortgage is worth the extra money. Let’s examine the pros and cons.
Pros and Cons of a Reverse Mortgage
There is one big advantage to reversing the mortgage on your home, and it’s an obvious one: you’re getting money. When you’re a retiree on a tight budget, getting a little extra every month doesn’t seem like a bad idea.
While the additional money is nice, you are taking out a loan after all. For starters, you’ll have to pay an application fee. Then you’ll pay monthly lender fees, origination fees, and additional fees depending on the lender. The interest rate on a reverse mortgage is higher than other home loans. Although you’ll be getting money, you’ll still have to pay the normal expenses of homeownership, such as property taxes and homeowners insurance. Furthermore, the reverse mortgage money can affect your eligibility for low-income assistance programs such as Medicaid and Social Security.
Are reverse mortgages worthwhile?
Almost every financial advisor would steer clients away from a reverse mortgage. You should think about what may arise in the coming years before taking out a reverse mortgage. What will you do in case of an untimely death? If you wanted to pass your home to an heir, a reverse mortgage can make the process difficult (and leave them with a mortgage they have to pay). Also, if your spouse didn’t sign the reverse mortgage with you, then she or he can’t continue living in the house after your death.
If you ever move out of the home, then you’ll need to start repaying the lender—even if you don’t consider yourself permanently moved out. For example, if you don’t sell your house but you stay in a nursing home for a year, most lenders will consider you to have “moved out”. You’ll no longer receive monthly payments and will be responsible for bearing the cost of the loan.
A reverse mortgage should be an absolute last resort. Instead of taking out one of these loans, consider selling your house and moving to an apartment or a more affordable property. A reverse mortgage can endanger the property you want to pass onto your family and lead to financial disarray in the face of unexpected emergencies.