Reverse mortgage basics
Pros and cons of a reverse mortgage
The upside is cash flow and staying put. The downside is higher fees than a conventional loan and a balance that grows against the estate you leave behind.
Pros
- Allows the homeowner to stay in the home.
- Can pay off an existing mortgage on the home.
- Simple to qualify for — no minimum credit score and generally no income requirement.
- No monthly mortgage payments are required, provided you live in the home as your primary residence, pay property taxes and homeowners insurance, and maintain the home to FHA requirements.
- Flexible payment terms: credit line, monthly payments, lump sum, or any combination.
- A reverse mortgage cannot get “upside down” — heirs are never personally liable for more than the home sells for.
- Heirs inherit the home and keep any equity remaining after the balance is paid off.
- Loan proceeds are not taxable.
- The interest rate may be lower than traditional mortgages and home equity loans.
Cons
- The fees are higher than a conventional mortgage because of the insurance cost. They are comparable to a traditional FHA mortgage. The largest costs are FHA mortgage insurance and the origination fee.
- The loan balance grows over time, which means the value of the estate you leave behind may shrink.
- Need-based assistance can be affected. Social Security and Medicare are not affected. Medicaid and SSI can be, if you withdraw funds and do not spend them within the same month.
- The program is widely misunderstood, which means you will hear confident, incorrect things about it from people who mean well.
On that last point: independent reverse mortgage counseling helps, and it is mandatory for a reason. Our goal is that every homeowner we work with is 100 percent informed on the entire process before they sign anything.
The most common objections, answered
Michele wrote up the six misconceptions she hears most often — including “the bank will take my house” and “it is only for desperate people.” Read that article.