What are the Pros & Cons of a Reverse Mortgage?

Reverse Mortgage Pros And Cons

A reverse mortgage seems a good idea to ensure a financially secure retirement and positively enhance the quality of life. While there are numerous benefits to this financial product, there are some drawbacks you must be aware of.

Read this guide to reverse mortgage pros and cons so that you can make an informed decision while avoiding mistakes when planning to get this product.

Reverse mortgage foreclosure timeline

Pros of Reverse Mortgages

  • No Monthly Payments

With a reverse mortgage, you can live for life in your home without paying monthly mortgage payments. The repayment of the loan balance is made when you leave your primary home forever based on when you obtained the mortgage. Since borrowers don’t make monthly payments with this product, qualifying for this loan is easier than for a traditional mortgage.

Also, there is no need for much income to qualify for a reverse mortgage. The borrower and lender should just confirm that you can easily afford your home. You also have the option to pay off a reverse mortgage loan early if you no longer want the loan.

  • Flexible Payment Option

Take your reverse mortgage proceeding in a single lump sum, line of credit, or monthly payment for the term of life.

  • Use Funds For Anything You Want

A reverse mortgage is a highly flexible product. These loan funds are considered similar to any other loans. These are not considered income. So you can utilize the money in any desired way. Borrowers with financial needs often tailor it to de-stress their post-retirement finances. Households with adequate resources consider it a great financial planning tool. 

  • Assured Line Of Credit 

For the duration, you own funds on your line of credit, and you fulfill all your obligations, the HUD keeps funds available to you. Banks often freeze the HELOC lines of credit without notice to the borrower.  It never happens with the HECM line of credit. 

Regardless of how long you occupy your home, the payments you take on a reverse mortgage, or no matter what the real estate values are, you and your heirs never have to repay more than your home’s value.

  • Buy New Home Outright With Home Purchase Feature 

A reverse mortgage not only helps to refinance your existing mortgage but also lets you purchase a new home. The Home Purchase feature works for those:

• Who wants to purchase a home

• Who needs to get home as per their needs

• Who wants to reduce their expenditure

  • Federally Insured

A reverse mortgage is synonymously used for federally-insured Home Equity Conversion Mortgage (HECM). It is backed by the Department of Housing and Urban Affairs. This is essential because even if your Reverse Mortgage lender comes out to be a defaulter, you’ll keep obtaining your reverse mortgage proceeds. 

Cons of Reverse Mortgages

You must keep in mind that a reverse mortgage may not be for everyone. There is a downside of reverse mortgages you should be aware of. When applying for reverse mortgages, consider the following:

What is the downside to a reverse mortgage?

  • Accumulating Loan Balance

The loan Balance on reverse mortgage increases over time as the interest as well as fees keep adding on.

  • Fewer Assets Passed To Heirs

As home equity is used, your successors get very few assets to own. Though you can leave the home to heirs, they have to repay the loan balance, which is often paid off by selling the home. 

However, they can pay it using other funds or refinancing through a forward mortgage. 

  • It May Involve Higher Fees

If the borrower is using the government-insured reverse mortgage, he or she has to make both upfront payments as well as mortgage insurance premiums for renewal purposes annually. Even though you don’t pay on your own, it involves substantial costs. 

The insurance ensures all parties involved in a reverse mortgage against possible risks. It also ensures that borrowers and their inheritors will not owe loan repayment more than the home’s value. 

The borrower receives no above the HUD maximum loan lending limit of $725,650. In this case, you may tap into jumbo reverse mortgages, such as proprietary or private reverse mortgages. These types of reverse mortgages are used for higher valued properties. However, interest rates for jumbo reverse mortgages can be extremely high. There are low-cost options as well.

  • May Affect Other Basic Financing Options 

If a borrower 62 or older draws funds from their loan and allows their liquid balance to be very high, s/he may face difficulty with qualifying for needs-based programs

  • Protection For Spouse

As per the revised guidelines of HUD in 2015, the borrower’s spouse below 62 years of age during the closing time is protected as an “eligible non-borrowing spouse.”  Spouses can also occupy the house for life.  They are responsible for maintaining the home reasonably manner, obliged for paying the property taxes as well as insurance. If they failed to pay for these expenses, a foreclosure is a possibility.

Borrowers and spouses should remember that eligible spouses are not the borrowers, and they can’t access the line of credit funds available after the death of the eligible borrower. 

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