A reverse mortgage, can be a valuable retirement planning tool. This type of mortgage allows homeowners 62+ years old to convert a portion of their home equity into usable funds without having to repay the loan for as long as the borrower continues to meet the loan obligations.1
As you evaluate this financing option consider the following advantages and disadvantages of reverse mortgage before deciding whether or not a reverse mortgage loan will meet your specific financial goals and needs.
Reverse Mortgage Advantages
- Access to home equity for many homeowners 62+ years old, their home is their largest asset. A HECM loan allows the borrower to convert a portion of their home equity into usable funds.
- No monthly mortgage payments – No mortgage payments are required for as long as the borrower continues to meet the loan obligations.1
- Very little upfront cash needed – most of the closing costs and fees associated with a HECM loan can be financed into the loan, so out of pocket expenses are kept to a minimum.
- Flexible disbursement options – Loan proceeds can be collected as a lump sum(fixed-rate only), a line of credit to be drawn upon as needed2, a monthly payment for a set period of time or as long as you live in the home, or a combination of these options.
- Loan proceeds are not taxed as income or otherwise.3
- Qualifying can be easier than for a conventional mortgage – You must meet the age requirements, have enough equity in your home, live in the home as your primary residence, the home must meet FHA property standards, and you must meet financial eligibility criteria as established by the U.S. Department of Housing and Urban Development (HUD).
- Non-recourse clause –HECM loans have a non-recourse clause which protects the borrower and his/her heirs from ever having to pay back more than what the home is worth.
- FHA Mortgage Insurance Premium (MIP) – HECM loans are insured by the Federal Housing Administration (FHA).4 The mortgage insurance guarantees that you will receive expected loan advances. You can finance the mortgage insurance premium (MIP) as part of your loan.
- HECM Counseling – Counseling with an approved HECM counselor is required. The counselor will discuss program eligibility requirements, financial implications and other alternatives to obtaining a HECM and repaying the loan.
Reverse Mortgage Disadvantages
- Fees – While all mortgages have costs associated with the loan, reverse mortgage fees are generally higher than a conventional mortgage but the cost will depend on the type of loan a borrower chooses.
- Mortgage Insurance Premium (MIP) – You will incur a cost for FHA mortgage insurance. The insurance premiums will accrue on your loan balance. You will be charged an initial MIP at closing. The initial MIP will be .5% or 2.5%, depending on your disbursements. Over the life of the loan, you will be charged an annual MIP that equals 1.25% of the outstanding mortgage balance.
- Inheritance for Heirs – Because a HECM uses home equity, it generally means that the equity in the home will decrease over time. This can sometimes come as a shock to some family members, so it is important to discuss with family in advance so everyone is on the same page.
- Needs based government programs – Although a reverse mortgage loan generally does not affect eligibility for Social Security and Medicare, needs-based government programs such as Medicaid may be affected.3
- If the last borrower no longer occupies the home as their primary residence, then the loan becomes due and payable – This can be a limiting factor. For example, the last borrower cannot choose to move out of their home and rent it out.
- Reverse Mortgages Perceived as Complicated – because reverse mortgages are less common and less well known than conventional mortgages, they can seem complicated and confusing. This is why it’s important to work with a licensed loan advisor who takes the time to explain all of your options and helps you understand the process each step of the way.
A reverse mortgage can be a valuable tool for seniors who are looking to turn their home equity into usable cash. Since the Federal Housing Administration (FHA) began insuring loans in 1989, efforts have been made to provide greater education and protection to senior borrowers. Still, some people have negative perceptions about reverse mortgages. Read more about these reverse mortgage myths and misconceptions.
If you are interested in learning more about whether a reverse mortgage might be right for you, call (800) 976-6211 to speak with a licensed loan advisor or try our free Reverse Mortgage Calculator.
1 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance, and maintain the home according to FHA requirements. Failure to meet these requirements can trigger a loan default that may result in foreclosure.
2 The funds available to the borrower may be restricted for the first 12 months after loan closing, due to HECM reverse mortgage requirements. In addition, the borrower may need to set aside additional funds from the loan proceeds to pay for taxes and insurance.
3 Generally, money received is not considered income and should be tax free, though you must continue to pay required property taxes. Consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.
4 Federal Housing Administration (FHA) mortgage insurance premiums (MIP) will accrue on your loan balance. You will be charged an initial MIP at closing. The initial MIP will be .5% or 2.5%, depending on your disbursements. Over the life of the loan, you will be charged an annual MIP that equals 1.25% of the outstanding mortgage balance.