A reverse mortgage is a unique loan option available to homeowners 62 and older who own their home outright. With a reverse mortgage, you can unlock your home’s equity and remain in your home without loan payments. The following reverse mortgage pros and cons explain what you should know when considering if one is right for you.
A reverse mortgage comes with several advantages. The proceeds of the loan can be used for virtually any purpose, such as enhancing your quality of life in retirement, paying down debt, supplementing your retirement income, or paying for long-term care. The proceeds will not affect Medicare or Social Security benefits.
With a reverse mortgage, you will not have mortgage payments to make. The loan will only be due if you sell the home, pass away, or move. In this case, the loan will become due, and you or your heirs can choose to pay off the balance and keep the home or let the lender take possession. While the balance of the loan will grow, you can never owe more on a reverse mortgage than your home is worth.
There are also many ways to receive the proceeds of your reverse mortgage. You can choose a line of credit to be used as needed, a lump sum of money, monthly payments, or some combination.
Despite the benefits, reverse mortgages have significant drawbacks to consider. The balance of the loan won’t exceed the value of your home, but it can make it difficult to pass on the home to heirs because they will likely need to take out a new mortgage for the full value of the home to keep it. Reverse mortgages also come with high initial fees.
There are no payments to make, but you will be responsible for maintaining your home and paying homeowners insurance and property taxes. If you fail to meet these obligations, the loan can become due.
Before taking out a reverse mortgage, consider other options that may be available. For example, a HELOC may be more affordable if you are only going to stay in your home for a few years. Another option is a life insurance settlement. If you have a life insurance policy with cash value, your policy is an asset. Selling your life insurance policy can give you access to the money you need now without high upfront closing costs and other drawbacks of a reverse mortgage.