Reverse mortgage: the pros and cons

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Reverse mortgages can offer extra cash for seniors, but there are drawbacks. Learn what you should take into consideration before taking out a reverse mortgage.

Seniors are feeling just as cash-strapped as the rest of Americans right now. Many have lost a good portion of their retirement fund in the stock market collapse, some have lost their jobs, and others are feeling the pinch of rising health-care costs. The idea of tapping into your home equity through a reverse mortgage can sound appealing, but it isn’t right for everyone. Get Monthly Cash Flow with a Reverse Mortgage

Advantages of a reverse mortgage

The biggest advantage of a reverse mortgage home loan is, of course, the extra money you can receive. In general, the older you are, the more your home is worth, and the lower the interest rate, the more you can borrow against your home’s equity. There are other upsides to taking out a reverse mortgage as well, such as:

  • You retain the title of your home. However, if you stop paying your real estate taxes, insurance, and utilities, and your loan will come due.
  • You can’t outlive your loan. In part, how much equity you receive is determined by your life expectancy. If you live beyond the predetermined life expectancy, however, you will continue to receive payments from your lender as long as you still live in your house.
  • You can receive payments through regular installments, as a line of credit or some combination of the two.
  • You do not have to pay taxes on reverse mortgage loan advances.
  • In general, money you receive from your reverse mortgage does not affect your Social Security or Medicare benefits. Many reverse mortgage payments can be structured so that monthly payments are spent the same month they are received; this prevents your payments from being considered as income.

Disadvantages of a reverse mortgage

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While there are many advantages of a reverse mortgage home loan, there are some disadvantages as well, such as:

  • You’ll have to pay hefty fees. These fees cover the loan origination, document preparation and other closing costs—which can cost around 2 percent of the loan value.
  • You will lose equity in your home. A reverse mortgage is a loan that will need to be repaid when you move out of your home. This could mean less money for you to apply to other expenses.
  • You will leave fewer assets for your heirs. If you die while still living in your home, your reverse mortgage loan will be repaid through your home sale, reducing the value of your total estate. (However most reverse mortgages include a “nonrecourse” clause, which prevents your estate from owing more than the value of your home when the loan is repaid.)
  • Your reverse mortgage home loan grows over time. Just like with any loan, interest is charged on your outstanding balance and added to your monthly payments. This means your debt is increasing over time as the interest on your loan accrues.
  • You cannot deduct interest from your reverse mortgage on your income tax return until the loan is paid off.

Other factors to take into consideration

  • How long you plan to remain in your home. If you plan to sell your home in the near future, then taking out a reverse mortgage might not make sense for you.
  • If you can secure the needed funds through another means. Consider refinancing or selling your home for one less expensive.
  • Reverse mortgage options can be confusing. To learn whether a reverse mortgage is right for you, consult with a fee-only financial planner (visit napfa.org to find one near you) or a HUD-approved counselor, who provides services free of charge.

This article contains general information. Individual financial situations are unique; please, consult your financial advisor or tax attorney before utilizing any of the information contained in this article.

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Source: CNNMoney.com, HUD.gov, Moneywatch.com, Federal Trade Commission, Consumersunion.org
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