Benefits and Risks of a Reverse Mortgage
In the year 2012, there were 9500 Americans who turned 62 [source: U.S. Census Bureau]. These retirees quit their jobs or were let go because of the poor economy. They now are finding themselves with no income and only a small pension. They have to face high living expenses and rising health costs. The costs of raising a family and taking care of elderly parents has stretched their incomes to the limit. Many of theses retirees are thinking a reverse mortgage may be the way to get the money they need.Many people as themselves what is a reverse mortgage? It is the because it is least understood financial product.
What are the Pros and Cons of Reverse Mortgages?
Pros
- If your home is your principal residence you are allowed to tap into your home equity and not have to pay it back.
- In most cases, the loan doesn’t have to be paid back until the last surviving borrower dies, sells the home or permanently moves out.
- The money is not taxable and doesn’t effect your Social Security or Medicare benefits.
- You can use the proceeds from the reverse mortgage with no restrictions.
Cons
- Costs and fee for the reverse mortgage do not come out of pocket, they are paid from the proceeds of the mortgage. Reverse mortgage costs are higher than a regular mortgage.
- The paying of real estate taxes, homeowners’ insurance and home maintenance are the responsibility of the owner. You are contractually required to take care of and properly maintain the home.
- Mortgage insurance is required to cover costs associated with a decreasing home values or if the home owner resides in the home for a longer than expected period of time. This will decrease the amount of money you receive.
- A reverse mortgage is a debt that increases over time. The interest continues to accrue and also compounds over time. The equity of the home also decreases over time. When the home owner is deceased and the heirs want to keep the house the reverse mortgage has to be repaid and sometimes the amount to repay is more than the market value of the home.
- It’s important that you reside in the home, in some cases, you can lose your house if you vacate it for a prolonged stay in a nursing home, rehabilitation center or hospital. Even though you intend to return home, the lender can require repayment of the full loan balance plus interest.
It’s important to be well informed when taking on any kind of financial contract. With a reverse mortgage this is also true. You need to be informed and educated to all the details and stipulations of your reverse mortgage contract.
Finally, when shopping for a reverse mortgage it’s best to compare many different plans and get all the facts. It is also good to work with a reverse mortgage counselor. If you go to the HUD or AARP websites you can find information to help you make an educated choice.
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