pros and cons of a reverse mortgage

Pros and Cons of a Reverse Mortgage

If you are a senior and considering a reverse mortgage, you should consider the pros and cons of a reverse mortgage prior to making your decision.

Pros of a Reverse Mortgage

  1. You retain title to your home while receiving a steady stream of income form the equity in your home.
  2. The “income” you receive from the reverse mortgage is not considered “income” in the traditional sense of the term.  It is considered loan proceeds; there, it likely will not be taxed.  (This is not tax advice; you should consult a tax professional.)
  3. The reverse mortgage loan will generally not affect your social security or Medicare benefits.  (This is not financial advice; you should consult a financial professional.)
  4. When the loan matures, you do not have to pay more than the value of the home when it is sold even if your loan is greater than the value of your home.  Moreover, the only asset the lender can procure as repayment for the loan is the house.  Therefore, you do not have to worry about the lender going after any other assets you own.
  5. You will not be evicted from your home as long as you meet your loan terms and continue to pay for the property taxes, insurance, maintenance, homeowners association fees, etc.
Cons of a Reverse Mortgage
  1. The costs involved in obtaining a reverse mortgage, including the interest rate, loan origination fee, mortgage insurance fee, appraisal fee, title insurance fees, and other closing costs are higher compared to obtaining a traditional mortgage.
  2. One of the events that triggers the loan maturity date is if you stop using your home as your primary residence.  For example, if you decide, or your health obligates you , to move into a retirement or nursing home, your loan will mature, and you will be obligated to repay the reverse mortgage.
  3. The reverse mortgage will decrease the equity in your home, resulting in less money to leave to your heirs.
  4. Reverse mortgages are extremely complex, so the contract that you sign may be full of hidden language and provisions that you may not understand.  Moreover, the reverse mortgage salesperson is likely paid a commission; therefore, they may be forceful and try to pressure you into entering into the reverse mortgage contract.
  5. If only one spouse’s name is on the reverse mortgage contract and the borrower dies prior to the borrower’s spouse, transfers the home, or no longer uses the home as his/her primary residence, then the loan will mature even if the spouse continues to use the home as his/her primary residence.  If the spouse cannot repay the loan, then the lender may sell the house, leaving the spouse homeless.

There are many complexities involved in a reverse mortgage.  Therefore, it is crucial to consult with an attorney prior to entering into such a contract.  We at Schorr Law are happy to assist you with determining whether a reverse mortgage is the right choice for you.

See related: What is a Reverse Mortgage?

By Carina Woo
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