Pros and Cons of a Reverse Mortgage?

Answer 1

As the population ages and as life expectancies have risen in recent decades, many senior citizens are quickly realizing that they have not saved enough money for retirement. Social security may provide some income, but often it’s not enough to offset monthly expenditures. In order to have a new source of income, some seniors are choosing to take out a reverse mortgage on their home. A reverse mortgage is a type of loan where the bank makes payments to the homeowner with the proviso that after the homeowner dies or no longer lives in the house, the loan will be repaid by the surviving family or through liquidation of the home.

To qualify for a reverse mortgage, individuals must be at least 62 years old, own a home outright, and use that home as a primary residence. The amount of a reverse mortgage is dependent on the value of the home, the borrower’s age, and the current interest rates. Once the reverse mortgage has been approved, homeowners can elect to receive the equity of their home in one lump sum or spread out in a series of monthly payments.

Although there are many advantages to having a reverse mortgage, there are also some cons.

One advantage of having a reverse mortgage is that instead of making payments to the bank, the bank pays the homeowner, giving them extra income. Payments are made as long as the person lives in the home, which could potentially be long enough that the payments received outweigh the value of the home. Also, with a regular mortgage, not everyone can be approved or pass credit checks. Because of the nature of a reverse mortgage, credit checks are not necessary. Finally, the value of the loan is locked in at the time of closing and tied directly to the value of the house. After the homeowner’s death, his or her heirs will only be responsible for the value of the home.

The primary disadvantage of a reverse mortgage is that the fees and closing costs are high. Also, the additional income received through the reverse mortgage may disqualify some homeowners from receiving Medicaid or other state or federal government assistance programs. Finally, the burden of repayment falls on the heirs of the homeowner. If they cannot repay the debt, they will be forced to surrender the home to the lender.