Reverse mortgages are rapidly gaining in popularity, in part due to the large baby boomer population now entering retirement. A reverse mortgage is very different than any other type of loan so it’s important to weight the pros and cons before deciding it’s the right option for you.
Pro: No monthly payments are required
As long as you remain in your home, there will be no payments necessary on a reverse mortgage. Instead, you receive a stream of income from your equity. The loan will only become due once you are no longer living in the home.
Pro: Multiple ways to receive proceeds
A reverse mortgage creates a source of income with the ability to select the amount you receive either as regular payments, a lump sum, a line of credit, or a combination of these options.
Pro: It won’t affect Medicare or Social Security
The money you receive from your reverse mortgage will have no penalties for Medicare or Social Security payments you receive.
Pro: A reverse mortgage can improve cash flow in retirement
Unlike most loans which are provided in a lump sum amount, a reverse mortgage can help you supplement retirement income with monthly payments in addition to a line of credit or lump sum of money.
Pro: Heirs will not be liable for any balance that exceeds the home value
When the reverse mortgage becomes due, heirs can choose to walk away and let the lender keep the home or pay off the reverse mortgage balance to keep the home. If the balance of the loan exceeds the home value, heirs will not be liable for paying off the excess. If there is any remaining equity after paying off the loan, your heirs can keep it.
Pro: The proceeds can be used for an existing home loan
If you still have a remaining balance on your mortgage, the proceeds of a reverse mortgage can be used to pay off the existing balance so you can live in your home without a mortgage payment in retirement.
Con: A reverse mortgage can make it difficult to pass the home to heirs
When the primary borrower dies or moves out of the home, the loan becomes due in full. This can may it difficult to pass your home to your relatives as heirs cannot keep the home unless they repay the loan. In most cases, this means heirs will need to take out a new mortgage on the home.
Con: There are unique conditions to the loan
There are a few conditions that will apply to your reverse mortgage. You will not need to make any payments on the loan as long as you live in the home, but the loan will become due when you die or move out, including to a nursing facility or an extended hospital stay. You will be required for keeping current on home maintenance, property taxes, homeowner’s insurance, and any HOA fees as well.
Con: The fees can be high
A reverse mortgage usually has closing costs and fees that are higher than conventional loans, although fees vary by lender. Total fees can be several percentage points of the value of your home.