Advantages and Disadvantages of Reverse Mortgages
Guide to Reverse Mortgage Pitfalls and Benefits
For many people, a Reverse Home Mortgage (now referred to as RM) is a good way to increase their income in retirement – positively affecting their quality of life.
Advantages:
The main advantage of RMs is that they are an extremely flexible financial planning product with very few – if any – restrictions on how you receive and use the money.
To many people, a RM simply sounds too good to be true. But, there really are no catches. Given the right set of circumstances, a Reverse Mortgage is an ideal way to increase your spending power in retirement.
Key advantages and benefits of RMs include:
· No Risk of Default:
o Unlike a home equity loan, with a Reverse Home Mortgage your home can not be taken from you. If you default on a home equity loan, you could lose your home.
o The RM Lenders have no claim on your income or other assets.
· No Downside: With a RM you will never owe more than your home’s value at the time the loan is repaid, even if the RM lenders have paid you more money than the value of the home. This is a particularly interesting advantage if you secure a Reverse Mortgage and then home price declines.
· Tax Free: The money from a RM is typically tax free, since it’s a loan when the homeowner receives the funds, as either additional fixed income or a lump sum.
· No Restrictions: How you use the funds from a RM is not restricted – go traveling, get a hearing aid, purchase long term care insurance, pay for your children’s college education – anything goes.
· Flexible Payment Options: You can receive the RM loan money in the form of a lump sum, annuity, credit line or some combination of the above.
· Easy Pre-Qualifications: There are no income qualifications to get a RM.
· Home Ownership: With a Reverse Mortgage, you retain home ownership and the ability to live in your home.
· Guaranteed Place to Live: You can live in your home for as long as you want when you secure a Reverse Mortgage.
· Federally Insured: The Home Equity Conversion Mortgages (HECM) is the most widely available Reverse Mortgage. It is managed by the Department of Housing and Urban Affairs and is federally insured. This is important since even if your Reverse Mortgage lender defaults, you’ll still receive your payments.
· Recently Increased Lending Limits: As of Nov. 6, 2008 the Department of Housing and Urban Affairs increased the loan limit on the HECM to $417,000. And, for loans written in 2009, the loan limit is $625,500.
Disadvantages:
A RM may not be for everyone, consider the following:
· Beware if You are Eligible for Low-Income Assistance: If you are currently or will be eligible to receive low-income assistance from the Federal or State government (like Medicaid), you will want to be careful that income from a Reverse Mortgage does not disqualify you from that assistance. (NOTE: Social Security and Medicare are not impacted by a Reverse Mortgage.)
· Reconsider if You Are Planning to Move in the Near Term: Since a Reverse Home Mortgage loan is due if your home is no longer your primary residence and the up front closing costs are typically higher than other loans, it is not a good tool for those than plan to move soon to another residence.
· Evaluate if You are Willing to Reduce Your Heirs Inheritance: Many people dismiss a RM as a retirement option because they want to be sure their home goes to their heirs. And it is true, a RM decreases your home equity – affecting your estate. However, you can still leave your home to your heirs and they will have the option of keeping the home and refinancing or paying off the mortgage or selling the home if the home is worth more than the amount owed on it. There are numerous potential Estate and Retirement Planning benefits to a RM- see Innovative Uses of a Reverse Mortgage for more information on these options.
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