Reverse mortgages allow you to access the equity in your home and use it as a steady source of income. However, there is much debate around this option. It is important to fully understand the pros and cons of reverse mortgages in making your decision. Here are a few key factors to consider.
What is a Reverse Mortgage
With traditional mortgages, the mortgage amount starts off with a large lump sum. Your monthly payments reduce the loan balance over time. Reverse mortgages, as the name implies, works in the opposite direction. Your loan amount increases over time as equity is disbursed to you. You do not need to repay the loan until you move, sell the home or die. Interest is charged on the balance of the loan. Up-front and annual mortgage insurance premiums also apply.
Qualifying for Reverse Mortgages
There is very specific qualification criteria for reverse mortgages. First, you must be 62 years of age or older. Secondly, the home being mortgaged must be your primary residence. Additionally, the total amount loaned may not exceed 58% of the home’s value. These are rules put in place by the Department of Housing and Urban Development (HUD). As with any type of mortgage, additional rules may apply.
Pros of Reverse Mortgages
Reverse mortgages can be an important source of supplemental income for seniors. It can help cover housing and medical expenses when retirement savings and other sources of income are insufficient to meet financial needs. Rather than taking out a huge mortgage up-front and paying interest on that high balance, it allows for a gradual increase in loan amount and therefore potentially less interest overall.
Cons of Reverse Mortgages
There are some disadvantages of reverse mortgages that are important to acknowledge. First, this loan does not come without costs. In addition to closing costs and other origination fees, there is a 2% up-front 0.5% annual mortgage insurance fee. Since the loan balance gets higher over time, this means that the equity in the home will be less. This leaves less to pass on to heirs upon your death.
Should You Obtain a Reverse Mortgage
Reverse mortgages should fit in to your overall retirement and estate plan. Without considering the big picture, you could negatively impact your financial situation. Be sure to consult with your estate planning attorney to discuss this and other possible options. If you do not already have a Massachusetts elder law and estate planning attorney, contact our team to schedule a consultation. We will take the time to understand your needs and goals and will explain all potential options to you.