Reverse Mortgage Pros and Cons

Article Sourced by Rebecca Porter, OneTrust Home Loans

Retirement planning can be complex, especially when it comes to ensuring financial stability and maintaining a comfortable lifestyle. One option that often goes overlooked is the reverse mortgage. I want to share with you some strategic uses of a reverse mortgage, debunk common myths, and highlight some key considerations for retirees. Whether you’re curious about the benefits, looking for a reverse mortgage calculator, or evaluating the pros and cons, this article will provide the insights you need to make an informed decision.

What is a Reverse Mortgage?

A reverse mortgage, specifically the Home Equity Conversion Mortgage (HECM), is a financial product that allows homeowners aged 62 or older to convert a portion of their home equity into cash. There are two types of reverse mortgages. The FHA Home Equity Conversion Mortgage (HECM) and the Jumbo, proprietary. The HECM is insured by FHA and the proprietary follows FHA guidelines, but loan limits go up to $4 million, while 2024 FHA HECM limits are at $1,149,825.00.

Either loans allows you to stay in the home for a lifetime and is a NON recourse loan. Unlike traditional mortgages, reverse mortgage borrowers have the option to make monthly mortgage payments. Instead, the loan is repaid when the homeowner sells the house, moves out permanently, or passes away. It’s a really versatile tool for retirement planning.

Strategic Uses of a Reverse Mortgage

1. Asset Strategy

   • Extend Retirement Savings: Use the proceeds from a reverse mortgage to make your retirement savings last longer by reducing withdrawals from other investment accounts.

   • Diversify Wealth: Supplement your retirement income and diversify your financial portfolio by incorporating home equity.

2. Mortgage Payoff

   • Eliminate Monthly Payments: Pay off an existing mortgage to free up cash flow and eliminate the burden of monthly mortgage payments​​​​.

3. Cover Bills

   • Unexpected Expenses: Establish a line of credit that grows over time to cover unexpected expenses or emergencies.

   • Monthly Income Supplement: Receive regular payments to supplement your monthly income, covering everyday expenses and medical bills.

4. Retirement Home

   • Right-Size Your Living Situation: Use a reverse mortgage to buy a new home that better fits your needs, whether it’s downsizing to reduce maintenance or relocating closer to family​​​​.

   • Fund Home Modifications: Make necessary home improvements or modifications to age in place comfortably.

5. In-Home Care

   • Health and Wellness: Use funds to pay for in-home care services, ensuring you receive the support you need while staying in your home​​​​.

6. Social Security Bridging

   • Delay Benefits: Use the reverse mortgage proceeds to cover living expenses and delay claiming Social Security benefits, potentially increasing your lifetime benefits​​​​.

Reverse Mortgage Myths and Realities

It's essential to understand the realities of reverse mortgages. There’s a lot of misinformation out there. Here are some myths and realities.

• Myth: The bank owns your home.

  • Reality: You retain ownership of your home as long as you meet the loan obligations, such as paying property taxes and insurance​​.

• Myth: You must own your home outright to qualify.

  • Reality: Many reverse mortgage borrowers use the loan to pay off an existing mortgage, which is a requirement for obtaining a reverse mortgage​​.

• Myth: Reverse mortgage proceeds are taxable.

  • Reality: The proceeds are loan advances and are not considered taxable income. However, it’s advisable to consult a tax professional for specific advice when it comes to Medicaid or other asset programs.

Reverse Mortgage Requirements

You must meet certain requirements to qualify for a reverse mortgage. Here are some of them:

• Age: You must be at least 62 years old.

• Home Ownership: The home must be your primary residence, and you must continue to live in it.

• Financial Obligations: You must stay current on property taxes, homeowner’s insurance, and any homeowner association fees. You must also maintain the home in good condition​​​​.

We wrote this guide to help you better plan and prepare for retirement. You’ll find a list of the professionals we recommend you talk to and the questions you should ask them as you prepare for retirement.

• Downsizing

• Taxes

• Finances

• Estates

• Healthcare

Pros and Cons of a Reverse Mortgage

Pros of a Reverse Mortgage

• Access to Funds: You get to utilize your home equity for various financial needs while still staying in your home. If you plan to retire in place, this is a great option.

• Flexible Payment Options: You can choose from lump sum, monthly payments, line of credit, or a combination of these options​​.

Cons of a Reverse Mortgage

• Loan Costs: Reverse mortgages come with fees and closing costs. These can get wrapped into the loan that you are incurring with the mortgage process, so there can be little to no out of pocket costs.

• Impact on Inheritance: The loan must be repaid when the homeowner passes away or moves out, which may affect the inheritance left to heirs.

• Home Maintenance: You are responsible for maintaining your home and staying current on taxes and insurance​​. You’d need to do this anyways as a homeowner, but it is a requirement with this type of program.

Is it worth it?

A reverse mortgage can be a valuable tool for retirees looking to increase their financial security and maintain their current lifestyle without having to sell their home. It’s important to understand the strategic uses and consider the pros and cons of of this home equity loan. Always consult with a financial advisor or mortgage specialist to explore your options and ensure a reverse mortgage is right for you.