What are the Pros and Cons of a Reverse Mortgage?
It’s hard to find something that doesn’t have a downside. Whether or not to get a reverse mortgage does not escape this axiom. What it usually boils down to: Do the pros outweigh the cons? Also consider, what is the downside of a reverse mortgage? Let’s look at some of the pros and cons of a reverse mortgage and hopefully this can help you decide whether or not it is the right product for you.
Reverse Mortgage Pros:
1. You don’t have to make mortgage payments. You get a loan and you don’t have to make payments! This is probably the biggest pro you’ll ever run across. Wouldn’t it be nice to go to the grocery store over and over again, buy anything you want, and not pay for any of it for as long as you live? That’s similar to what happens with a reverse mortgage.
2. You can access the equity of your house without selling the house or moving out of it. This is a big plus knowing that you can stay in the comfort of your own home indefinitely and supplement your income at the same time.
3. You can receive monthly payments for the rest of your life, just like social security. If you choose and you have enough equity, every month a deposit is made into your checking account and these funds are insured by the federal government. Not a bad thing to have. You may also want to consider a jumbo reverse mortgage in California if you qualify.
4. You don’t pay taxes on the money you get from a reverse mortgage and there are no restrictions on what you can do with those funds. Anytime you don’t have to pay taxes is a good thing.
5. You can get a line of credit that includes a growth rate of 4 to 5 percent. Try getting 5 percent interest with your savings account from your local bank or credit union.
6. Freedom. A reverse mortgage will allow you to do things you would not normally do because you wouldn’t have the necessary funds available. This freedom could include traveling to places you have never been before or perhaps contributing to your grandchildren’s college education. This is a reason many seniors choose to get a reverse mortgage.
7. Security. You will have deep pockets in the event of medical emergencies or other unexpected expenses.
Reverse Mortgage Cons
1. Loss of equity. This is probably the biggest con. Since a reverse mortgage is a loan, and the borrower is not making payments on a monthly basis to pay back that loan, interest continues to accrue which INCREASES the balance of the loan. That is why it is called a “reverse” mortgage, the balance is going up not down. There are ways and choices to diminish that process but overall that is the reality of a reverse mortgage.
2. Expense. A reverse mortgage can be expensive as far as house loans go. Most reverse mortgages are HECM loans (home equity conversion loans) which are insured by the federal government (FHA). To cover its cost and risk, the government charges an upfront insurance fee (MIP) which currently is rather pricey for the HECM product and contingent on the appraised property value. This insurance fee can get as high as $15,000. This is in addition to the standard closing costs of a mortgage loan plus an additional small monthly MIP charge to boot. So when you add it all up it, yes, it becomes comparatively expensive. There is a possibility that in due time FHA will reduce these fees but as it now stands expense should be taken into consideration when debating whether or not to go forward with the loan. These fees do not come out of pocket, they are deducted from the proceeds of the loan.
3. You can’t live elsewhere without paying back the loan in full. You can own other property, and if necessary temporarily live elsewhere like in a nursing home or with relatives, but your primary residence must be the property through which you received the loan and you can’t be away from that house for more than one year. If so, the loan is due in full.
So if you live in California (or any other State) email us or give us a call at Reverse Your Mortgage and we will provide exact information to help determine if this is product worth considering for your specific needs. We have over ten years’ experience and provide the lowest rates in the country.