Advantages and Disadvantages of Reverse Mortgages
Reverse Mortgages can be a great tool for protecting a senior’s livelihood and helping them stay in their homes as they age. Also, Reverse Mortgages can help senior homeowners pay their day to day living expenses, cover the cost of large expenses, or even help them purchase a new home. But while a Reverse Mortgage provides opportunity for financial security, it can also present considerable financial risk for the wrong homeowner.
Advantages of Reverse Mortgages
There are three major advantages to choosing a Reverse Mortgage:
#1. No mortgage payments required. Instead, the loan consists of payments that go to the homeowner, either in a lump sum, recurring monthly payments, a line of credit or a combination of these.
#2. The loan doesn’t need to be paid off until the last surviving borrower no longer uses the home as their primary residence.Even if one borrower passes away or has to go to a nursing home, their spouses (even a non-borrowing spouse) is permitted to continue living in the home and does not have to repay the loan.
#3. Once the loan is due to be repaid, the homeowners’ heirs are not held responsible. Typically, the homeowners’ heirs or estate will choose to sell the home and any money leftover after satisfying the Reverse Mortgage debt is theirs to keep. Even if the home doesn’t sell for enough money to cover the Reverse Mortgage, the FHA absorbs the loss, leaving the homeowners’ heirs free from financial liability.
Please note that each Reverse Mortgage borrower’s situation may be different, and what may work well for one homeowner may not be ideal for all.
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Possible Disadvantages to Reverse Mortgages
To understand the key disadvantages of Reverse Mortgages, we should look at the 3 main advantages in a different light:
No mortgage payments are required, because you are essentially borrowing against your home’s equity. The money you’re receiving from the Reverse Loan is “paid for” through the value your home has built up over time. If you don’t mind losing your home’s equity in order to receive the financial proceeds of a Reverse Loan, then this won’t be a disadvantage to you. On the other hand, if you had hoped to sell your home some day or pass it down to your children for them to sell, putting your equity on the line could be unwise.
Reverse Mortgage debt actually increases over time instead of decreases. Plus, the loan balance is likely to grow faster than a traditional loan, since Reverse Loans charge compound interest (interest charged on top of interest). This makes Reverse Loans quite expensive in the long run, leaving the amount that is owed at the end much more than the amount of money that was actually borrowed
Once the loan is due to be repaid, the homeowners’ heirs are not held responsible, but they will most likely have to repay the loan if they want to keep the home. This could be the biggest drawback to Reverse Mortgages for homeowners who want their children/heirs to inherit their home after they die. When a Reverse Mortgage is involved, the borrowers’ heirs will most likely need to find a way to satisfy the debt before they can inherit the home. Otherwise, they can choose to sell the home and keep any profits leftover after repaying the Reverse Mortgage or, if the heirs or estate does not sell the home or if there are no heirs/estate, the Reverse Mortgage lender will likely foreclose on the mortgage and sell the home at a discount in order to avoid suffering a substantial loss.
Please note, some of the scenarios mentioned on this page may not apply to every potential Reverse Mortgage borrower. We encourage consumers to research Reverse Mortgage options and speak with a professional lender to determine if a Reverse Mortgage is right for their needs.
Learn more about how people are using home equity conversion mortgages for purchasing homes:
Please keep in mind that the reverse mortgage industry in constantly changing and some of the information contained on this site may not be current. Please ask a licensed reverse mortgage professional for up-to-date guidelines.