The Pros and Cons of Reverse Mortgages

Tom Selleck is well-known for his signature mustache, as well as his Hawaiian shirt-wearing role in the 1980s drama series, Magnum P.I. But, these days, Selleck has traded in his crime-solving prowess to tout the positives of reverse mortgages for American Advisors Group (AAG).

AAG is clearly trying to clean up the less-than-rosy reputation of reverse mortgages. You may be aware that reverse mortgages have been dubbed as a scam and a way to “steal” the home of older, retired Americans. But what’s the truth?

Let’s consider a few of the positives and negatives of reverse mortgages—and then you can decide for yourself if it’s a scam or a viable financial option.

The Upside to Reverse Mortgages

A reverse mortgage is, first and foremost, a loan. Simply put, if you are 62 or older and need to supplement your income or retirement, you can turn your home equity into cash.

Now, if you still have an existing mortgage, the funds are used first to pay off your mortgage and then your mortgage lender will give you cash for the value of your home. You can receive this cash in a lump sum, in monthly payments, as a line of credit or a combination of payment options.[1]

Again, to be clear, this is a loan, not cash free and clear.

But one of the primary benefits for a reverse mortgage is that you don’t have to make monthly payments on the mortgage. Rather, the loan is paid off when the house is sold or the homeowner passes.[2] So, the fact that you have more cash at your disposal right now has made reverse mortgages more popular today.

It’s also important to note that reverse mortgages are considered non-recourse loans. In other words, if the house eventually sells for less than the total amount of the loan, you don’t have to pay the difference. The cost will be absorbed by your lender or FHA. And, conversely, if it sells for more than the total loan, you or your heirs will receive the difference.[3]

Aside from more cash on hand and no mortgage payments, a few other pros to reverse mortgages include: your home’s title is still yours, the cash from the loan isn’t taxable and the money will not negatively impact your Medicare or Social Security benefits.[4]

The Downside to Reverse Mortgages

Now, for the flip side… what are the negatives of reverse mortgages?

It’s called a reverse mortgage for a reason. With a traditional mortgage, you make monthly payments, build up equity in your home and don’t owe anything at the end of your loan’s term. But, with a reverse mortgage, the opposite is true: you don’t make monthly payments, you won’t have any equity in your home and you’ll owe the full loan amount at the end of the term.

You also need to understand that while you’re gaining a lump sum of cash, there are fees associated with that transaction. There are lender fees and closing costs, insurance premiums and mortgage counseling, as well as interest on the loan balance.[5]

All of your other bills associated with your home also don’t magically disappear. You’re still required to handle any home maintenance fees, homeowners insurance and property taxes.[6] The home maintenance costs are particularly important, because you want the value of your home to equal or be more than the total reverse mortgage.

Also, the home has to remain your primary residence. If you live outside of that home for more than 12-straight months—i.e., your health fails and you move into a treatment facility, nursing home or assisted living facility—you are then required to repay the loan in full.[7]

Other negatives to consider: a reverse mortgage could impact your Medicaid or Supplemental Security Income (SSI), and your house could be foreclosed on if you fail to pay property taxes, HOA fees or property insurance.[8]

Is a Reverse Mortgage Right for You?

So, the question is: Should you “reverse your thinking” when it comes to mortgages?

Everyone’s financial situation is different. There is no “one size fits all” when it comes to your retirement and overall finances. But, if you are facing financial hardship and are thinking of alleviating the financial burden with a reverse mortgage, consider talking to a financial professional first.

There are a lot of different reverse mortgage options out there—Home Equity Conversion Mortgages (HECMs), proprietary reverse mortgages and single-purpose reverse mortgages. There is also a plethora of reverse mortgage lenders with their own fees, terms and options. Determining which is right for you requires research and asking the right questions.

The financial advisers at Nicollet Investment Management can help by walking you through your finances, considering all of your options, and developing a financial plan that accounts for your current needs and expenses, as well as your retirement goals.

To get started, call Nicollet Investment Management to schedule your free portfolio review today.

Please click here for important disclosures.

[1] https://www.quickenloans.com/learn/what-is-a-reverse-mortgage-how-does-it-work-and-what-are-the-pros-and-cons

[2] https://www.investopedia.com/mortgage/reverse-mortgage/

[3] https://www.quickenloans.com/learn/what-is-a-reverse-mortgage-how-does-it-work-and-what-are-the-pros-and-cons

[4] https://www.consumer.ftc.gov/articles/0192-reverse-mortgages

[5] https://www.lendingtree.com/home/reverse-mortgage/reverse-mortgage-pitfalls/

[6] https://www.lendingtree.com/home/reverse-mortgage/reverse-mortgage-pitfalls/

[7] https://www.investopedia.com/mortgage/reverse-mortgage/5-signs-reverse-mortgage-bad-idea/

[8] https://www.bankrate.com/mortgages/reverse-mortgage-pros-and-cons/