A reverse mortgage is essentially a loan against your home that you do not have to pay back for as long as you live there. It allows homeowners age 62 or older to borrow cash from the equity in their homes without having to make monthly payments. Homeowners can receive cash in a lump sum, through monthly payments, as a line of credit whenever they need money, or any combination of these options.
Reverse Mortgage Pros
Reverse mortgages are backed by (and regulated by) the federal government (HUD and FHA). This is a “non-recourse loan,” which means that the heirs of the seniors are not responsible for repaying the loan. In fact, a reverse mortgage is a loan that does not have to be repaid until both homeowners (assuming a couple) leave the home permanently, or pass away. No monthly payments are required.
The money the elderly receive from a reverse mortgage is tax free, and does not interfere with SSI or Medicare benefits. Some elderly people are using the extra cash flow to pay for in-home care, adult day care, prescription drugs, credit card debt, and home repairs.
Reverse Mortgage Cons
Eventually the loan must be repaid. Both principal and interest come due when the homeowners move, sell the house or die. And, because no monthly payments are being made, the amount owed will grow over time as interest costs build up and, in some cases, as additional funds are advanced.
The homeowner remains responsible for paying property taxes and insurance and for maintaining the house. Failure to do so can cause the reverse mortgage to become immediately due and payable in full.
While reverse mortgage proceeds do not affect Medicare or Social Security, they can affect Medicaid.
To understand the potential pros and cons of a reverse mortgage, talk to financial advisors and qualified housing counselors.
Overview
- You can receive the funds in a lump-sum, monthly, a line of credit or a combination of these options
- Homeowner can stay in the home without making monthly payments
- Eliminates existing mortgage payments
- Heirs are not personally liable if payoff balance exceeds home value
- Heirs inherit any remaining equity after paying off the reverse mortgage
- Proceeds are tax-free; however, please consult with your financial advisor
- Loan balance increases over time
- Value of estate inheritance may decrease over time as proceeds are spent
- Fees can be higher than a traditional mortgage
- Loan origination fee may be higher than traditional mortgages
- Although Social Security and Medicare eligibility are not affected by a reverse mortgage loan, needs-based government programs such as Medicaid can be affected if the amount of funds withdrawn from a reverse mortgage loan exceed the monthly income limits.