For many retirees, rising living costs and limited income can make financial stability feel out of reach. A reverse mortgage, also known as a home equity conversion mortgage (HECM), may offer a solution — allowing homeowners aged 62 and older to turn their home equity into cash without selling or making monthly payments. But while this option can provide much-needed relief, it also comes with risks that could impact your long-term financial health.
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In this guide, we break down 12 key pros and cons of reverse mortgages to help you make an informed decision — and avoid costly surprises down the road.
Reverse Mortgage Qualifications
In order to apply for a reverse mortgage, you must meet the following qualifications:
- You must be 62 years of age or older.
- You must live in the home you own.
- Your home must be paid off or have a low enough mortgage balance for you to pay it off with funds from the reverse mortgage transaction.
- You must have the financial means to pay your property taxes and insurance.
- You must receive consumer information, which is typically free or very inexpensive, from an HECM counselor before obtaining the loan.
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The Upsides
Seniors can use the payments from these specially structured loans to supplement their incomes, pay for healthcare and cover their expenses. Even better, the money is usually tax-free, even though it’s used as income.
You keep the title to your primary residence, and your Social Security benefits and Medicare benefits aren’t affected. Perhaps most importantly to seniors concerned with security, you don’t have to pay the money back for as long as you live in your home. Additional pros include:
- No mortgage payments: You don’t have to make mortgage payments, like you would with a traditional mortgage. Thus, a reverse mortgage is an affordable option for seniors on a fixed income.
- Receive payments: Getting money through a reverse mortgage helps with cash flow.
- No taxes on proceeds: Money you receive from a reverse mortgage is not subject to taxes, which also helps if your income from other sources is inadequate.
- No need to sell your home: A reverse mortgage allows you to tap into the increase in your home’s value without having to sell the home.
- Can delay using retirement savings: Using the money from a reverse mortgage to pay expenses keeps you from having to drum up cash by selling stocks and other investments. This gives such investments more time to grow.
The Drawbacks
If you do sell your home, or even if you just move out, you have to pay the money back. If you die first, your spouse or your estate picks up the tab for you, although in some cases, a non-borrowing spouse can remain in the home. Even in those cases, however, the surviving spouse will no longer receive payments since they weren’t on the loan.
In a lot of cases, the home must be sold to pay back the reverse mortgage loan. That’s bad news for any heirs who were expecting a windfall of inheritance. Other cons include:
- You lose tax breaks: Interest paid on reverse mortgage loans is not tax-deductible, even in part, the way interest on a traditional mortgage is.
- The bill grows with time: With every reverse mortgage payment you accept, interest is added to your growing balance and the cumulative effect never ceases for the life of the loan.
- Expensive in the long run: Monthly servicing or origination fees, insurance premiums and mortgage interest are added to the amount you initially borrowed, and interest is then recalculated periodically on that amount. That means over time, the amount you owe grows.
- Involvement of all homeowners required: Everyone listed on the title for the property must also be named on the reverse mortgage, and at least one of you must be age 62 or older.
- Homeownership costs: A reverse mortgage requires you to stay up to date on property taxes, utilities and insurance premiums. The terms can be complicated for many homeowners to understand.
- Residence required: You cannot have a reverse mortgage on a property unless you live in the home. So if you move — to a nursing home, for example — the reverse mortgage will come due.
- Possible impact on Medicaid payments: Reverse mortgage loans might impact your payments from Medicaid or other public assistance programs.
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If you go with this financial plan, you’ll be able to stay in your home for many years, and if you’re confident you’ll be able to afford the ongoing homeownership costs, it could be a good deal for you. Simply put, reverse mortgages are just another way for homeowners to tap their equity. Like home equity loans, home equity lines of credit (HELOC) and cash-out refinances, reverse mortgages are loans borrowed against equity — but they’re structured differently than the rest.
With regular mortgages, borrowers increase their home equity with each monthly payment they make to their lenders. Just as the name would have you believe, reverse mortgages do the opposite — the lender takes part of the equity in the home and converts it into payments made to the borrower. So, if you’re wondering if it is a good idea for you, here are some key questions to consider:
- Are you willing to pay the up-front and long-term costs of a reverse mortgage? Upfront costs include lender fees, your initial mortgage insurance payment and closing costs. Loan interest and recurring mortgage insurance payments represent long-term costs. A lower interest rate from a mortgage company like SecurityNational Mortgage Company — an HUD-approved lender for reverse mortgages — can save you hundreds or thousands of dollars over the life of the loan. Locate the best reverse mortgage interest rates by shopping a wide range of reverse mortgage lenders.
- Do you plan on staying in your home? If you don’t plan on staying in your house for the long haul, the upfront costs won’t be worth it.
- Do you live on a fixed income with few financial resources? If you’re approved for a reverse mortgage and can’t pay your property taxes or insurance, you’ll risk the possibility of a foreclosure.
- Will your partner or spouse who lives with you be a co-borrower? Your significant other must be a co-borrower or they’ll have to vacate the home. The co-borrower must repay the loan if you die.
- Is it important to leave your home to your children or other heirs? If this is important to you, a reverse mortgage might not be a good choice because you could have to sell your home to repay the loan.
Andrew Lisa and Cynthia Measom contributed to the reporting for this article.
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This article originally appeared on GOBankingRates.com: 12 Reverse Mortgage Pros and Cons To Help Retirees Avoid Financial Disaster
