The Pros and Cons of Reverse Mortgages

 

The Pros and Cons of Reverse Mortgages

 In an effort to keep older folks in their homes, Congress passed the Reverse Mortgage Bill. This bill allowed the Federal Housing Authority to guarantee mortgage lenders who specialized in mortgages that dealt with home equity conversions. These special type of loans are limited to people who are at least sixty-two years of age. These types of loans are secured by the borrower’s primary home, for an amount that provides enough equity so that the loan can be repaid upon maturity. These types of loans can be used on single-family homes, condos, and a few types of manufactured homes.

 These types of mortgages were particularly popular throughout the recent recession, especially amongst older Americans who may have been counting on their fixed and budgeted income to last them through their retirement. Reverse mortgages allowed these individuals to supplement their cash flow to help get them through retirement. All though these types of home mortgages are very popular amongst seniors, they may not be for everyone. If you are thinking about getting a reverse mortgage, it is important that you educate yourself on the various pros and cons of this type of loan.

 The main benefit of a reverse mortgage, the waiver of your mortgage payment. This provides the borrower with a cash advance on their home equity, which is repaid when the last borrower leaves the home.

 

Cons:

 -  Reverse Mortgages are Regulated By the Federal Government:

Due to the nature of reverse mortgages, they are regulated by the Federal Government to ensure consumer safety. Although on the surface this may seem like a big positive, many people consider this to be a negative due to the stringent regulations that the government imposes in order to qualify for a reverse mortgage.

 

 -  Your Home Must Contain Enough Equity in Order to Qualify for a Reverse Mortgage:

 These types of mortgages were created to help individuals access the equity sitting in their homes. Pulling this equity from the home, converting it into cash, and then using that cash to supplement your cash flow throughout retirement can be a very smart move for many retirees. This can be a draw back for individuals who do not have enough equity in their homes. If you have built up enough equity in your home, then you will be able to tap a portion of your home’s equity in cash.

 

 -  Not All Property Types Will Qualify for A Reverse Mortgage

 These types of loans were created with sole purpose of providing seniors a home where they can enjoy retirement. However, this does not apply to vacation homes or investment properties. Only the borrower’s primary residence may qualify for this type of loan. Other types of properties that may not qualify for this type of loan are homes that are not FHA approved, mobile homes, and certain types of condos.

 

-  A Reverse Mortgage is Secured by Placing a Lien Against the Property

 When you take take out any type of home equity mortgage loan, a lien will be placed on the home. This lien acts as collateral for the mortgage loan. This rule also applies to reverse mortgages. This can be seen as a downside to home owners that prefer to own a home that is completely paid off.

 

 - To Avoid Foreclosure, the Home Must Be Maintained and Insured

 With a reverse mortgage, loan repayment is usually paid by the sale of the home. Therefore, a home must be kept in good condition so it can sell at a price that is equal to or greater than the loan balance. It is important that the borrower make sure that they keep up with basic home repairs, as well as making sure the home is protected by home owner’s insurance.

 It is also important that borrowers keep up with property taxes. Not paying your property taxes could cause your home loan to become due and payable. While these types of expenses

 

 Pros:

-   There are no Monthly Mortgage Payments Required or the Loan

 With typical mortgage loans, there is usually a form of repayment that is required to keep the loan in a satisfactory state. This means that an amount of your income must be applied to this mortgage expense. With a reverse mortgage, there are no required monthly mortgage payments. The repayment of the loan is deferred until you have moved out of the house, pass away, default on the loan, or when you decide to sell the home. This can be great because you can use the funds that would have typically been allocated towards repayment of the loan on other expenses.

 

-   The Proceeds From the Loan are Non-Taxable

Easily one of the most popular features of a reverse mortgage, any funds received from the loan are viewed as loan proceeds and not income. This means that any proceeds from the loan are not taxed. Some some types of retirement investments are taxed if you draw from them, so it is a big plus to have a source of money that does not have this type of restriction.

 

-   You can Live in the Home for as Long as You’d Like

 As mentioned earlier, the main goal of these types of mortgages are to help seniors stay inside of their home. The terms of these types of loans require that certain responsibilities must be met in order to avoid foreclosure on the property. As long as you abide be these loan terms, you can can live in your home and receive the fund from your equity.

 

-   You are Protected From Owing More Than the Value of the Home When it is Sold

Due to Federal Insurance Protection, the FHA does not require you to pay more than what your home is worth when you decide to sell it. This is great news, because it allows you to eliminate any worry that you or your heirs may have about being left with additional debt from the reverse mortgage after your home has been sold.

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