What are the Pros and Cons of a Reverse Mortgage?
Just as with any major financial decision, it is important to fully understand the pros and cons to help determine if a HECM reverse mortgage product is right for you. Choosing a reverse mortgage could provide supplemental income now and, in the future, – but it’s not the right choice for everyone. This page is a great place to start if you want to understand some of the benefits and drawbacks of the reverse mortgage.
Pros of a Reverse Mortgage
Cons of a Reverse Mortgage
- No repayment if the home is your primary residence and you stay current on property taxes, insurance, and home repairs.
- Supplement your fixed income with reverse mortgage funds.
- Use the reverse mortgage proceeds any way you choose.
- No prepayment penalties if the mortgage is paid off early.
- Most closing costs can be financed into the loan, which reduce out-of-pocket costs.
- You and your estate will never owe more than the fair market value of the home as determined by a licensed FHA-certified appraiser when the reverse mortgage becomes due and payable.
- Flexible disbursement options: lump sum, monthly long-term payment, line of credit or a combination of these.
- Can be used to pay off other existing mortgages.
- Depending on the program, the up-front fees may be higher than other types of financing.
- Reduces the amount of equity for your heirs.
- Could affect government need-based assistance like Medicaid and Social Security Income (SSI).
- Can become due and payable when a “maturity event” occurs, such as the last surviving borrower (or non-borrowing spouse meeting certain conditions) passes away, the home is no longer the borrower’s primary residence, or the borrower vacates the property for more than 12 months for non-medical reasons. The mortgage will also become due if the homeowner fails to stay current on property taxes, insurance, homeowner’s association fees, and maintaining the property.
Borrowers should be able to make an independent and informed decision on whether the reverse mortgage product will meet their specific financial situation. In addition to understanding the pros and cons of a reverse mortgage, borrowers are expected to meet certain program requirements to be eligible for the program.
Obligations as a Reverse Mortgage Borrower
HECM Government Regulations
- Continue paying your homeowners insurance.
- Continue paying your property taxes.
- Continue with your basic home maintenance and repairs
- You must use reverse mortgage funds to pay off any other mortgage you may have.
- Comply with all loan terms, such as living in the home as your primary residence.
- Before application, you must complete a counseling session with an FHA-approved counselor. This counselor will help educate you on the reverse mortgage and make sure you know all your options.
- Lenders must complete a financial assessment to analyze income against expenses. Although your income is not used to qualify you, if the ratios show that you have difficulty paying recurring taxes, insurances or other obligations, you may need to set aside money from your funds to pay your financial obligations.
To learn more about the steps involved in the reverse mortgage, continue to our process page.