Last Updated on March 9, 2021 by Filip Poutintsev
A reverse mortgage is a mortgage loan, usually secured by a residential property, that lets you convert a portion of the equity in your property into cash.
Opposed to a regular home loan where you make regular payments to the lender, here, the lender makes payments to you. These payments can either be a cluster sum or a monthly payment.
To qualify for a reverse mortgage, owners must be at least 62 and should live in the house as a permanent residence. They must pay property taxes and insurance costs. If they don’t keep the house in good condition, the lender can foreclose. The reverse mortgage is repaid when the borrower dies, permanently moves from the residence.
History of Reverse Mortgage
The reverse mortgage was first born in 1961 when Deering Savings & Loan in Portland, Maine, designed one to help a widow Nellie Young stay in her home after her husband’s death.
The program soared in 1988 when Congress passed a bill giving the FHA authority to insure the loans. With 115,000 loans, activity peaked in 2008, however, the Great Recession cut that annual number almost in half.
Today, reverse mortgages still only account for 1% of the $11.5 trillion in U.S. mortgages. But the number of eligible applicants is expected to go from 46 million now to 98 million in 2060, consistent with 2017 statistics from the Department of Health and Human Services.
Advantages and Disadvantages of Reverse Mortgage
A reverse mortgage could be a valuable retirement planning tool, providing funds now and for the future, but it is not the right choice for everybody. It is important to understand the advantages and disadvantages before making a decision.
Advantages of Reverse Mortgage
A reverse mortgage can be a powerful source of funding for certain individuals. It increases income without increasing monthly payments while allowing a retiree to stay in his or her home. Some pros of getting a reverse mortgage are listed below.
1. No Monthly Mortgage Payments
As long as you live in the home and continue to meet your obligations, no monthly mortgage payments are required. However, as with any mortgage, you must meet your loan obligations, keep current with property taxes, insurance, and maintenance.
The money obtained from a reverse mortgage is not subjected to any tax because it is not considered taxable income.
3. Guaranteed Line of Credit
As long as you have funds left on your line of credit, the availability of your funds is ensured. No matter how long you live in your home or how many payments you take or what happens to the real estate values, you and your heirs can never owe more than the property is worth.
4. Fund Options
You can take the fund monthly as well as in lumps of the sum. You can also choose a combination of these options.
A reverse mortgage is a “non-recourse” loan. This means that you, your heirs, or your estate will never owe more than the appraised value of the home at loan maturity.
Disadvantages of Reverse Mortgage
Although a reverse mortgage feels like free money, it’s still a loan. Some downsides associated with it are explained below.
1. Higher Closing Costs
Fees may be higher than with a traditional mortgage. Some of them include mortgage insurance, closing costs, origination fees, and servicing fees. While all of these fees can be included in your loan, they will reduce the amount you receive.
2. Age Restriction
You must be at least 62 if you want a reverse mortgage insured through FHA. For those with younger spouses, further problems could arise. In general, if both spouses don’t qualify for an FHA-insured reverse mortgage, it is better to wait until both meet the requirement.
3. Your Heirs Could Lose the Home
If your estate doesn’t have enough in assets to pay off the loan, it might not be possible to pass your home to your heirs. Once you die, the loan becomes due and your heirs must figure a way out of it.
4. Loan Becomes Due If You Move Into Long-Term Care
If you are out of the house for more than 12 consecutive months due to a medical issue, your loan is likely to come due. When that happens, you either need to sell off the house or pay off the loan using some other funds.
Although you don’t have to make mortgage payments, you’re still responsible for the applicable property taxes, insurance, and maintenance. If you fail to meet the requirements, your home can be foreclosed on. So, you should set aside some money to make these payments if you don’t want to risk losing your home.
If you don’t intend to leave your home, a reverse mortgage can give your budget a much-needed boost. It allows you to live more comfortably and can be a great idea. However, if you have short-term needs or have no desire to stay in your home indefinitely, you might be better suited for another equity loan.
In the end, like any other financial tool, a reverse mortgage is not inherently good or bad. You need to understand how it works and consult a financial advisor to decide if it’s right for you.