Robert Wagner pitches reverse lending on TV, but are these loans as shady as the fate of his former wife, Natalie Woods, or a smart financial move that will have you living like a star?
Reverse mortgages have been attracting an increasing amount of interest from homeowners in the last couple of years, but it’s time to investigate and have a real “Hart-to-Hart” about their pros and cons.
Reverse Mortgage Pros:
The Easy Way to Tap Home Equity
After several years of economic turmoil and tightening of underwriting guidelines, for many it may not be a matter of weighing reverse mortgage pros and cons, but this may be the only way to tap into home equity. As there are no repayments required to pay off reverse mortgages, and borrowers may be receiving funds from their loan on a regular basis, credit and income are not factors in loan approval. Providing you are over the age of 62 and have a significant amount of home equity, you should be a good candidate for a reverse mortgage loan.
Live Like a Hollywood Star Now
Even with a solid equity position, many U.S. homeowners can find it extremely difficult to sell their homes for near what they paid for them. No one likes taking a big loss. So if you need a lump sum of cash now to cover medical bills, help out a family member, or just need to increase your monthly income to cover everyday living expenses or maintain the lifestyle you are accustomed to, a reverse mortgage may be just what you need.
The reverse mortgage offers flexibility. For example, the Federal Housing Administration (FHA) Home Equity Conversion Mortgage (HECM) offers five different options for accessing home equity. The borrower can choose between:
- Tenure: The borrower receives monthly payments for life.
- Term: The borrower receives monthly payments for a fixed amount of time.
- A line of credit: The borrower can make withdrawals, up to a maximum amount, whenever he or she chooses.
- Modified tenure: A combination of the tenure and line of credit options.
- Modified term: A combination of the term and line of credit options.
Peace of Mind
Perhaps the most important factor of all to consider when weighing reverse mortgage pros and cons is peace of mind and financial security. By choosing an option that includes fixed monthly payments, you will never have to worry about not having the steady income you may have lost when you retired. If you don’t need the extra cash to spend now, it could come in handy for life’s small emergencies or beginning to gift your assets to your heirs with minimal tax consequences and ensuring that it really gets into the hands of those you care about the most.
Reverse Mortgage Cons:
Fees and Costs
When it comes to reverse mortgages pros and cons, many point to the front-end loan costs as a negative, , especially when opting to take regular income payments over a long period of time. However, before homeowners allow this to scare them off, they should weigh the true cost of other options like selling and paying a real estate agent commission or refinancing. In reality, a reverse mortgage will still often be the most cost effective choice.
What Will I Leave the Kids?
Many seniors worry that by tapping into their home’s equity they deplete assets that can be left to their children. Loan expenses due at the end of the loan, either when the homeowner dies or sells the house, can significantly eat into whatever equity remains. This is a valid concern and one that should be discussed with your accountant.
The Mortgage Interest Deduction
One of the benefits of reverse mortgages which lenders frequently highlight is the mortgage interest deduction, which can essentially makes proceeds from these types of loans tax free and can help to offset other tax liabilities. However, as the government struggles to reduce the national debt and spending, many fear that the mortgage interest deduction could be one of the first things to go. So you may want to speak with your accountant if this is a factor in your decision to pursue a reverse mortgage.
Effects on Government Assistance
Robert Wagner may never have to worry about having to apply for Medicaid, but you might. Depending on your circumstances, the income from reverse mortgages could affect eligibility for various forms of government assistance and is definitely something that should be taken into consideration.
Unveiling the Cover-Up
Tapping into your equity now can obviously have effects on your financial future. However, there are some skeletons in the closet too. In the past some reverse mortgage lenders have developed notorious reputations for predatory prepayment penalties. Some homeowners who lived longer than they expected and wanted to cash in on surging equity during the recent boom found clauses in their loan documents that entitled lenders to a large percentage of any increase in property value when the loan was closed out. In some cases this amount was hundreds of thousands of dollars.
In summary, when analyzing reverse mortgages pros and cons, homeowners should recognize that the right decision all comes down to their personal circumstances. Then, should you decide you’d like to learn more about the process and how it may benefit you, contact the United States Department of Housing and Urban Development (HUD). They will direct you to a HUD-approved HECM counselor who will answer all your questions and guide you in the right direction.