Consumers Guide to the Pros and Cons of a Reverse Mortgage

Before tapping into one’s home equity, seniors should carefully consider both the pros and cons of a reverse mortgage. While these loans benefit many borrowers, it is important for seniors to consider all of their different options. To help determine whether a reverse mortgage might be in a consumer’s best interest, potential borrowers can review these reverse mortgage pros and cons.


The Disadvantages of Reverse Mortgages

To cash-poor seniors, a reverse mortgage might seem like the best way to utilize their home equity. However, when discussing the pros and cons of a reverse mortgage, many seniors get stuck on the price of these loans. While reverse mortgages carry many of the same costs of conventional mortgage loans, borrowers who want a federally-insured loan, or HECM, must also pay mortgage insurance premiums (MIPs).

Depending on the loan product one chooses, borrowers will pay an upfront MIP of 2% or 0.01% of their claim amount, plus an annual MIP equal to 1.25% of the loan balance. While this might seem expensive, mortgage insurance is what guarantees borrowers that they will never owe more than their home is worth. Without this insurance, many seniors would end up owing thousands over the value of their home. So while mortgage insurance might be somewhat expensive, most borrowers agree that it is well worth the cost. Also, like all other fees, MIPs are financed into the loan, which eliminates any out-of-pocket costs to the borrower.

When considering the pros and cons of a reverse mortgage, it is also important to remember that borrowers must follow a few guidelines to keep their loan from becoming due. To keep a reverse mortgage in good standing, borrowers must make all necessary home repairs and maintain the condition of their home. Borrowers are also required to pay their property taxes and keep homeowners insurance. If a person cannot afford these costs, the loan will become due prematurely. Unless the borrowers can rectify the situation with their lender, they might be in danger of losing their homes.


Reverse Mortgage Pros and Cons: Focusing on the Benefits of Reverse Mortgages

While it is important to consider both reverse mortgage pros and cons, many seniors focus on one very important fact: reverse mortgages allow seniors to stay in their homes while eliminating their monthly mortgage payments. Depending on a borrower’s age and amount of equity, he or she might also be eligible to receive additional cash. Because loan proceeds are not considered taxable income, borrowers get to keep their proceeds tax-free. For the same reason, a borrower’s Social Security and Medicare benefits will remain unaffected. Of all the reverse mortgage pros and cons, this is the benefit that tends to resonate with seniors.

However, reverse mortgages do not just eliminate mortgage payments; they also allow seniors to defer payment until both borrowers pass away, sell the home, or vacate the residence. If both borrowers decide to move into a nursing home, they will be given up to 12 months before the loan becomes due. Since one’s mortgage payment is often their largest expense, eliminating this expense can significantly increase a consumer’s cash flow. Other types of mortgage loans simply do not offer this benefit.

Because reverse mortgages allow seniors to defer payment and repay their existing mortgage balance, these loans help to keep more seniors in their homes. Seniors who are in danger of foreclosure or are otherwise ineligible for a conventional mortgage loan might still qualify for a reverse mortgage. While consumers should weigh both the pros and cons of a reverse mortgage, one fact is abundantly clear: these loans provide seniors with an invaluable benefit--their financial independence.