Reverse mortgages can be tricky, and it’s easy to get into a bad situation. You must be careful and ensure you understand the benefits as well as the risks before getting into one. A reverse mortgage is an option for those who have paid off most or all of their home loan and need to access some of the home’s equity. They’re generally offered to those over 62 years old and are only available on a primary residence. The funds are distributed as a lump sum or a line of credit to be used as needed. The balance doesn’t need to be paid off until the homeowner either moves out or passes away. If the homeowner moves out, they have one year to finalize the loan. If they pass away, the estate or heirs handle the loan.
Let’s start with some potential negatives of reverse mortgages. Reverse mortgages will come with additional costs such as origination fees and mortgage insurance. Many of the interest rates are variable, meaning they’ll increase over time. The interest also accrues on an increasing loan balance rather than paying down the loan, and the interest payments are not tax deductible. Because you’re borrowing equity, this profit is reduced, therefore limiting your estate value. There also may be strict maintenance requirements from lenders to protect the resale value of the home, and failure to comply with the terms of the reverse mortgage can result in a default or foreclosure. Medicaid qualifications can be impacted because of the funds being received from the reverse mortgage. And finally, there are many scammers out that they prey on seniors, so it’s critical to choose someone you trust.
Let’s now look at some reasons it may make sense to get a reverse mortgage so you can weigh your options. A reverse mortgage can allow someone to stay in their beloved home rather than needing to downsize or move when they don’t want to. Proceeds from the loan can be used to pay off existing mortgages and free up funds to live more comfortably. Payments aren’t required until after the homeowner moves out or passes away, relieving stress during important years of one’s life. Money from a reverse mortgage is not taxable by the IRS. Additionally, if the value of the home falls below the reverse mortgage balance, heirs of the estate only do not have to pay the deficit. Another great benefit is that reverse mortgages do not have credit requirements or income stipulations, so if a home has sufficient equity, the homeowner can access it.
If a homeowner plans to move in a few years, wants to leave a home for their family as inheritance, has relatives or roommates living together in the home, or will struggle to cover the cost of the mortgage, it’s a good idea to look for other options than a reverse mortgage. Refinancing, lines of credit, or downsizing may be a better choice. At InterWest Mortgage, we provide honest advice on options for your situation.