Reverse Mortgage: Pros and Cons

Reverse Mortgage: Pros and Cons

Reverse mortgages are notoriously known for scammers and unscrupulous loan officers who target older individuals and persuade them to use their equity in the home to borrow money. However, some legitimate scenarios exist when reverse mortgages make sense for older homeowners.

This article discusses reverse mortgages, their pros and cons, and whether or not you or your family should consider a reverse mortgage.

 

What Is a Reverse Mortgage?

A reverse mortgage is a loan that pays the borrower each month instead of the borrower making payments to the mortgage servicer.

Reverse mortgages come with many stipulations and must be paid back when the homeowner either moves out of the home or dies. This often leaves the surviving spouse and heirs responsible for paying back the reverse mortgage upon their death—which results in selling the house in most cases.

 

Who Are Reverse Mortgages Meant For?

Reverse mortgages are only available to borrowers 62 and older. Most borrowers who take out reverse mortgages have paid off their homes and are interested in using the equity to qualify for a loan that pays them each month to cover their expenses as they age.

Older individuals using a reverse mortgage can still live in their homes and don’t have a monthly mortgage payment, but this doesn’t mean that the money from a reverse mortgage is free. The money borrowed through the reverse mortgage must be paid back to the lender when the home is sold or the borrower dies.

 

senior married couple smiling while sitting on couch

How Do Reverse Mortgages Work?

The most common type of reverse mortgage is a home equity conversion mortgage (HECM), and this is the type of reverse mortgage you’ll most likely be dealing with.

To qualify for a reverse mortgage, lenders establish a principal limit. The principal limitation is the amount of equity that the borrower can use to qualify for the reverse mortgage. It’s usually determined by the home’s value, current interest rates, HECM mortgage limits, and the borrower’s age.

The best way to understand how reverse mortgages work is to think of them as a cash advance on the home’s future sale. The lender is willing to pay you monthly cash installments and requires it to be paid back at a later date when the home is sold.

While reverse mortgages pay the borrower instead of the other way around, borrowers are still responsible for paying their homeowner’s insurance and property taxes in addition to the general upkeep of the property. Failure to do so may cause the home to go into foreclosure or have your lender call the loan and demand immediate payment for the entire loan amount.

 

Requirements for a Reverse Mortgage

In addition to being 62 years or older, there are several other requirements for reverse mortgages, including:

  • The borrower must own the property in full or have a substantial amount of equity in the home.
  • The borrower must not be delinquent on federal debt.
  • The subject property must be the borrower’s primary residence.
  • The borrower must have the ability to make their homeowners insurance and property tax payments.
  • The borrower must attend an information session from the Department of Housing and Urban Development (HUD) and meet with a HUD-approved counselor.

 

Reverse Mortgage: Pros and Cons

Before you can decide whether a reverse mortgage is right for you, it’s important to do you research. What may be a good financial decision for a friend or neighbor may end up being a bad financial decision for you.

To help you compare the two, let’s examine the pros and cons of a reverse mortgage.

Reverse Mortgage Pros

There’s no denying that reverse mortgages have benefits for older individuals. Below are some of the most common benefits you’ll get if you decide that a reverse mortgage is right for you:

  • Regular monthly income – Seniors who receive social security only receive about $1,540 per month on average. Those that have monthly expenses for home care, medical procedures, and prescription medicine may find that they require additional income to cover these essential needs.
  • No monthly payment – Instead of decreasing your loan balance over time with monthly mortgage payments, reverse mortgages increase your loan balance. They don’t require borrowers to make any payments as long as they live in the house.
  • An enjoyable retirement – Older individuals in retirement want to enjoy their golden years without worrying about where their money comes from. Reverse mortgages provide income that enables seniors to enjoy their retirement.

Reverse Mortgage Cons

What is the downside of a reverse mortgage? While reverse mortgages have a few benefits, the cons can outweigh the advantages. Most borrowers will find that reverse mortgages aren’t right for them. Below are some of the cons of reverse mortgages:

  • The balance must be paid back – The biggest con of reverse mortgages is that all the money given to the borrower while in the home must be paid back to the lender. This often leaves a significant burden for the surviving heirs if the homeowner dies.
  • Borrowers must still pay property taxes and homeowners insurance – While you may think a reverse mortgage means no monthly payment, borrowers are still required to pay property taxes and homeowners insurance separately.
  • Reverse mortgage fees and closing costs can be high – Although a reverse mortgage pays the borrower in monthly installments, this type of loan still comes with closing costs that you must factor in before taking out a reverse mortgage.

 

Mature woman looking shocked while on the phone

Reverse Mortgage Scams

Reverse mortgages got a bad name due to the number of scams that contributed to the financial crisis of 2008.

These scams involved telemarketers calling older homeowners and persuading them of the benefits they’ll receive from taking out a reverse mortgage. Some scammers deliberately failed to disclose key stipulations on repayment terms—including that once the borrower dies, the family is responsible for paying the loan back to the lender.

Today, scammers are getting much more creative. However, there still exist some common scams you can recognize if you think you or your family members may be targeted by a reverse mortgage scam. Some common red flags to watch out for include being contacted with an unsolicited offer, being told a reverse mortgage is the solution to your financial problems, or if the person is being overly pushy.

 

Final Thoughts

While reverse mortgages aren’t for everyone, there are some benefits for seniors who need an extra monthly income to pay for basic life necessities or to live a comfortable retirement. However, the downsides of reverse mortgages and the stigma around them are often enough to deter most qualified homeowners.

For homeowners and real estate investors looking to buy or sell a home in Central Florida, contact Leading Edge Title for the best title and closing services on the market today.

 

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