The Pros and Cons of Reverse Mortgages For Seniors
~ By Jeremy Johnson ~
Planning for retirement is a complicated matter and can leave many seniors short when they stop earning an income and need to rely on their savings. Reverse mortgages have been designed to provide seniors who have property equity with a means to cover any shortfall.
However, there are distinct advantages and disadvantages to using this financial tool that seniors need to know about before applying for a reverse mortgage.
What Is A Reverse Mortgage?
A reverse mortgage, available to seniors over the age of 62 years, provides a means to turn property equity into cash. Instead of paying an amount towards a mortgage every month, a bank or other financial institution provides cash in an amount of equity that is available in the mortgage loan.
This amount can be used for specific needs such as a home renovation to increase property value or can be spread over a period of time to meet other expenses. It allows the homeowner to retain their property and live in their home while providing for them financially.
It is important for seniors to understand that a reverse mortgage is not a quick fix for their financial woes and that it not always suitable for some requirements in retirement. The disadvantages include:
- To qualify, there needs to be enough equity available in the mortgage loan. This is the amount that has been paid towards the total amount owing.
- The equity provided may not be sufficient to cover financial requirements for an extended period of time. Seniors could outlive their equity.
- If a cash lump sum is selected rather than a monthly payment, the cash could disappear rather quickly. Seniors could also fall into the trap of unethical insurance providers offering products to solve financial problems without actually providing much, if any, benefit.
- The fees charged for a reverse mortgages are high, detracting from the overall value of the equity. Originator fees, closing costs and adjustable interest rates all affect the actual value of the equity received.
- Unless the reverse mortgage loan is repaid, the property will belong to the bank and cannot form part of an estate that can be inherited by beneficiaries.
- The appplicant must live in the home and second properties such as holiday homes or investment properties do not qualify for reverse mortgages.
- Should the homeowner leave the property for a period in excess of one year, the full loan amount will become due or they could face foreclosure.
- Rates and taxes as well as any other costs related to the property will still be the responsibility of the homeowner. The home must also be insured to qualify.
Of course there are just as many advantages to reverse mortgages or they would not be such an attractive option for seniors.
- Primarily they are a source of cash.
- Payouts are normally tax-free.
- They don’t affect government benefits such as social security or medicaid.
- The loan cannot be in an amount that is greater than the total value of the property, including costs. This means that property will cover the entire cost of the loan, even if the value of the property decreases or interest rates increase for any reason.
- Monthly mortgage payments can be made but are not required.
- Qualification and approval are simpler than for other types of loans.
It is essential for seniors to consider other alternatives to provide them with the finacial support they need before opting for a reverse mortgage. This should always be a last resort rather than a first choice.
Jeremy Johnson is a real estate enthusiast and has written content for dozens of real estate and related sites around the world. RealEstateCompanies.info is a side project he maintains because of his interest in real estate.