A reverse mortgage can be an extremely beneficial retirement tool for people who are 62 and older and want to tap into a portion of the equity in their home as a way to achieve financial security.
As long as you have enough equity in your home, it is not difficult to qualify for a reverse mortgage loan. However, there are several potential reverse mortgage disadvantages to consider.
Through a reverse mortgage, a borrower has the ability to access a portion of the equity they’ve built in their home. A borrower can receive the reverse mortgage proceeds as a lump sum, in monthly installments, as a line of credit, or a combination.
The borrower can spend the proceeds however he or she wishes, such as completing home repairs, or for any other use. The loan then becomes due and payable when you, the borrower, leave the home or pass away.
Impact on Heirs
Your heirs are responsible for repaying the reverse mortgage loan. If they choose to repay the loan by selling the home, your heirs are protected from ever owing more on the loan than the home is worth. This is a benefit of the mandatory reverse mortgage insurance premium. However, if your heirs wish to keep the home rather than sell it, the loan balance must be paid in full regardless of the property value.
Costs
A reverse mortgage is not without its costs, including upfront fees and mortgage insurance.
Upfront fees are similar to a traditional “forward” mortgage, and will include origination fees paid to your lender, appraisal fee and closing costs. Additionally, there is a mandatory upfront mortgage insurance premium and an annual mortgage insurance fee paid to the Federal Housing Administration (FHA), the agency that insures the loan.
Paying for the required reverse mortgage insurance can be expensive, as it calculated based on your age, current interest rates and your appraised home value (up to a maximum lending limit of $625,500), but it ensures that you and your heirs will never owe more than your home is worth, regardless of property value changes over time.
FHA also guarantees the reverse mortgage payments on the loan, so the borrower can rest assured that payments will come on time as scheduled in the amount agreed upon.
As in any mortgage, the borrower is responsible for paying property taxes and homeowners’ insurance and must keep the home in good repair.
Medicaid Eligibility
Because Medicaid eligibility depends on a beneficiary’s income and assets, it’s important to consider how a reverse mortgage could impact your financial situation. A reverse mortgage loan usually does not affect Medicaid eligibility, but you should consult your financial advisor and appropriate government agencies for any effect on your benefits.