The Pros & Cons of 5 Reverse Mortgage Features

Lounging in your living room, you take a look around at the space you have called your home for the last thirty years. The light fixtures you chose have added a warm glow to the kitchen and den. The crown molding you had installed nicely frames the painted walls. The wood floor displays a shine from under the charming furniture and area rugs you’ve chosen. You know that the additions and renovations you have made to your property have turned into a sizeable investment held by your home in the form of equity. And now, as you reach the age of retirement, you have begun to think about your options to access it.

Defining the Reverse Mortgage Loan

One option, called a reverse mortgage, has emerged as a popular choice amongst many retirees. A reverse mortgage is a loan that helps homeowners ages 62 years and older access a portion of the equity in their homes. The unique features of this loan allow you to receive your equity in cash and remain in the home, all without having to pay monthly mortgage payments. Repayment is instead deferred, so the loan does not become due and payable unless you permanently leave the home or default on loan terms. Because these features are attractive for those on a fixed income, the reverse mortgage has become a favorite solution for seniors interested in home-equity access and aging in place. However, as is recommended when considering any financial product, you must educate yourself on both the pros and cons of a reverse mortgage loan.

The Pros & Cons

Below are 5 main features of the reverse mortgage loan, and the pros and cons each may present to borrowers.

Feature#1: Aging at Home

Pro:

With a reverse mortgage, a senior homeowner can age at home. For borrowers who plan to live in the same home as they age, or who feel a sentimental attachment to their home, this is an advantage because they can access a portion of their equity as cash without having to give up living where they feel most comfortable.

Con:

However, a requirement of the loan is that borrowers must reside in the home primarily. If a borrower leaves the home to live elsewhere for more than twelve consecutive months, the loan may become due and payable. This may not be beneficial for borrowers who plan to travel or to visit family for extended periods of time.

Feature #2: Retaining Ownership

Pro:

A common misconception is that banks may take the title of your home. However, the truth is that as long as you fulfill all your loan terms, your home’s title does not change hands with a reverse mortgage. Ownership is still yours.

Con:

Because home ownership stays with you, home responsibility does as well. This means that as a reverse mortgage borrower, you are still responsible to pay your property taxes, homeowners insurance, any homeowner’s association fees, and basic home repairs.

Feature #3: Government Insurance

Pro:

The federally-insured reverse mortgage, called the Home Equity Conversion Mortgage (HECM), is well-regulated by the Federal Housing Administration (FHA). The agency provides consumer safeguards and regularly updates rules and regulations as the industry becomes more prevalent. In addition, a HECM reverse mortgage is a non-recourse loan. These loans are designed to protect you from owing more than the value of the home when sold. If your loan balance surpasses your home’s value by the time your loan matures, the mortgage insurance will cover the difference between your home value and the remaining balance. This also means that the lender cannot liquidate any asset other than your home in order to fulfill repayment of the loan.

Con:

Although it is rolled into the loan, there is a cost added to your total loan balance in the form of a Mortgage Insurance Premium. In addition, government regulation means both lenders and borrowers must follow specific rules and processes throughout the loan process in order for it to be approved. For example, FHA requirements mandate that borrowers undergo a financial assessment in order to determine whether they can afford the financial obligations of the loan.

Feature #4: Deferring Repayment

Pro:

One of the most attractive features of the reverse mortgage loan is that repayment is deferred until you leave the home, sell it, or pass away. This way, you can access your equity while still freeing yourself of a monthly mortgage payment. For many seniors it is the perfect way to live in their home for the rest of their life as well as reduce their monthly expenses in retirement.

Con:

Because payment is deferred until loan maturity, a lien will be placed on the home. In addition, since selling the home is the most common way to repay the loan when it is due, heirs who prefer to keep the home will need to find another method of repayment. Other methods include refinancing the home with a traditional mortgage, or using other cash funds.

Feature #5: Fund Set-Asides for Repairs

Pro:

One stipulation of the reverse mortgage loan is the requirement that you continue to maintain basic repairs of the home. This is because repayment of the loan is based on your home’s worth; thus it is important to keep your home in good condition in order to retain its value. Therefore, you may find yourself finally getting to complete those necessary repairs you may have been putting off.

Con:

However, because of this stipulation, if repairs are needed prior to loan closing, then it may become necessary to set-aside a portion of your loan funds for that purpose.

Is the Loan Right for You?

In addition to educating yourself on the cons and pros of a reverse mortgage and its features, it is also important to understand whom this loan will most benefit.

The reverse mortgage loan may not be the most efficient solution for you if:

- You plan to move out of your home soon.

- You might live elsewhere for more than 12 consecutive months.

- You are opposed to paying a premium for the loan’s government insurance.

- You oppose the loan’s federal rules and regulations.

- You want to leave your home to your heirs without refinancing necessary for them.

- You do not want your Supplemental Security Insurance or Medicaid to be affected.

The reverse mortgage loan may be the right solution for you if:

- You want to access a portion of your equity while aging at home.

- You are not interested in selling your home or moving out.

- You plan to live in your home for a very long time.

- You do not want a monthly mortgage payment anymore.

- You want to supplement your social security income, or pension.

- You are interested in a loan that defers payment.

- You don’t have heirs, or your heirs are not interested in inheriting your home without a lien.

- You prefer the government protection of federal insurance.

You are now better equipped to determine if this loan is right for you. Speak with an expert from a reputable reverse mortgage lender to learn more about the features of this loan, as well as to examine if your specific situation can benefit from it. With the equity from your home and a reverse mortgage loan, you just may have just the tools you need to create the retirement of your dreams.