Insurance

Reverse Mortgage Pros and Cons

Understanding reverse mortgage pros and cons is becoming more important what with America's population aging, home prices falling, the stock market crash of 2008 still not having been recovered from, the value of the dollar diminishing and a whole host of other financial concerns, it is likely that now more than ever the answer to the question "how are we going to live the life we hoped for?" may be found in the reverse mortgage. This often misunderstood and sometimes feared product could just be the difference between being comfortable in retirement and not retiring at all.

Let's take the reverse mortgage head on and look at the pros and cons. By reviewing the advantages and disadvantages of the reverse mortgage you will not only gain a better understanding of the powerful impact it could have on your life, but you should be able to set aside any fears you have had in the past. With a little counseling from a qualified expert you should then be able to determine without a doubt if the reverse mortgage is the right move for you.

I like to focus on the positive. So let's look at reverse mortgage pros first.

• It allows you to convert home equity into non-taxable income without having to sell your home
• The reverse mortgage allows many people whose home is their largest asset to convert that highly illiquid and passive asset to a very liquid asset that can be actively invested.
• With a reverse mortgage you never have to pay the loan back as long as you live in the property as your primary residence, keep the home maintained, and pay your taxes, insurance and HOA dues (if applicable).
• This one's the biggie; you will never...never under any circumstances, owe more than your home is worth. Neither will your heirs in the event you leave the home to them in your estate.
• Here's another biggie; you will never again have a mortgage payment.
• Something many people don't understand is that you can actually sell your home or even refinance out of a reverse mortgage in the future. Obviously you will need enough equity or cash on hand for either situation, and in the event you wish to refinance you would likely need to qualify for the new loan.
• This is a grossly underutilized retirement tool: you can place a reverse mortgage on an owner occupied income property of up to four units.
• You can use the proceeds of the loan to make maintenance repairs to your home to get it up to FHA appraisal standards.
• The loan is paid in full, along with any capital gains upon the homeowner's death. This is an effective way to defer capital gains to death and possibly completely remove them from the estate.
• There are no income or credit requirements* for a reverse mortgage.
• You can purchase a new home with a reverse mortgage. Again, without income or credit requirements.
• The note has no recourse. This means the lender cannot seek assets other than the available equity in the home for repayment of the loan. Again, the borrower and their heirs will never owe more than the home is worth.
• That being said, in a falling equity environment, the lender is the only party with asset devaluation risk.
• In many cases you will not only rid yourself of your current mortgage payment, but you may actually have the ability to structure the loan to pay you a monthly amount.
• Cash flow from the reverse mortgage will not affect social security and Medicare.
• There are no prepayments penalties
• Finally, all closing costs can be paid for with proceeds from the loan assuming there is sufficient equity to do so.

*While there are no restrictions regarding credit scores or history you cannot complete a reverse mortgage and have an outstanding federal lien or judgment. The government must be paid in full before or at closing.

O.K. Now for the negatives; there are some, although generally speaking, the reverse mortgage is either a great option for you and has very few drawbacks or it is simply not the right option. Here we go:

• As with any loan, there are costs associated with the reverse mortgage. These are generally in line with those of a conventional or FHA refinance and they are considerably lower than those of selling your home.
• Interest accrued on a reverse mortgage cannot be deducted until the loan has been paid in full.
• While there are no income or credit requirements for the loan, the borrower does need to have enough equity in the home to facilitate the mortgage. This is a rough estimate and by no means should it be used to disqualify yourself, but generally the home owner should have 30% give or take 5% equity in the home. In other words, if your current loan balance is higher than 70% of the value of your home there will need to be additional cash brought to the table.
• The home owner still needs to pay property taxes, home owner's insurance, and any applicable HOA fees after taking out their reverse. I'm reaching here. It's not really a con but it is something of which you should be aware.
• The home will need to be appraised and while you can escrow for some items to be repaired, a home in disrepair could be unqualified or could fall short on the necessary equity for closing.
• There is a mortgage insurance expense with a reverse mortgage as it is a HUD loan. This effectively increases the interest rate on your loan.
• There is an age requirement. The youngest homeowner must be 62 years of age or older to qualify. The calculation used to determine the amount of your loan is based on the youngest owner.
• A reverse mortgage may affect needs based programs other than Social Security and Medicare. It would be worth a phone call to your case worker if you are a recipient just to be on the safe side.
• On purchases there are no seller contributions allowed.
• Finally, the loan will reduce the equity in your home.

After reviewing the lists of advantages and disadvantages for reverse mortgage loans if you think it might be an option for you your next step would be to contact a reputable lender in your area. Then you will be given contact information for a couple of local counseling agencies that will act as a third party information source. The process is pretty simple and may just be the best thing you ever did for your retirement plan.