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.
Flexibility
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.
{ 7 comments… read them below or add one }
My Mother obtained a reverse mortgage. My understanding for her was that she would pay off some minor bills and be able to live a little more comfortably on her limited income. She, since obtaining the RM, has become mentally unstable (diagnosed early dementia). She has spent all of the equity in her home on her home. In her mind she was thinking my sister and I would want the home. She didn’t realize that once she spent the money, it would basically belong to the bank. My sister and I are on fixed incomes and there is no way we can afford to buy back her home. The homes in her neighborhood are not worth what she owes. If she could get $40 thousand, that would be about average for her neighborhood. Her RM is now up to $119 thousand. So, I feel RMs are not good for elderly and that perhaps people should be evaluated mentally before being allowed to obtain the RM. I don’t want my Mom’s house, but she is now where when she has to be put in a home, she has no money to put herself in a decent facility. So sad.
I’m trying to purchase back the reverse mortgage loan on my Grandmother house. My Grandmother did take the required counseling and her understanding was that my son only had to start making payment at her death. Not that he had to get an new home loan on her house. Because he already has an morgages loan on his home . To purchase the home back he has to get an new conventional mortgages loan and put 20% initial down payment plus closing cost.
Can I get a reverse mortgage if I don’t have any equity — I mean Can I buy a house ( 80,000.00 ) from the get go with a reverse mortgage — I might be able to put 10,000 down The house is an estate house my — mom died — and If I buy It I would owe my brothers sisters their part of it —- a total of 60,000.00 split three ways – they have agreed to reduce the price from 80,000 to 60,000 — for my part
Bill
Hi Bill,
Thanks for the question. Here are the requirements for an HECM purchase loan:
The youngest person on the title must be 62 years of age or older.
The home must be your primary residence and you must take occupancy within 60 days of closing.
The difference between the purchase price of the home and the loan proceeds have to be paid in cash from either the sale of a previous residence, your other assets or savings.
You must complete a HUD-approved counseling session.
Hope this answers your questions.
Often times accessing the equity in a senior’s home could provide them with the quality of life they’ve struggled to find up until that point. A counselor visit generally is one of the best tools for understanding the product and determining if it is the best choice for you, specifically the consumer.
i am looking to do a reverse mortgage and have taken the required counseling already and am looking for a lender that does modular homes and mobile homes
this is a great look at the pros and cons of the reverse – we have an entire site dedicated to this sole subject – great work here