Experts weigh the pros and cons of this loan - to help you make a smart choice.
For homeowners age 62 and older who have a significant amount of equity (appraised value minus mortgage balance) in their homes, a reverse mortgage can seem like an attractive option. Simply put, a reverse mortgage allows you to convert a portion of the equity in your home into cash, without having to sell your home. But this type of loan isn’t right for everyone. Here’s help determining if a reverse mortgage is the smart choice for you.
Pros: A reverse mortgage is a loan against your home equity, which you can take as a lump sum payment, a monthly payment, or a line of credit. The loan is paid off when you no longer live in the home. “It allows a homeowner to access home equity in the present in order to supplement current income,” says David Reiss, a professor of law at Brooklyn Law School who teaches residential real estate courses.
Consider this loan if you would like to stay in your current home and …
Have lived in your home for a long time and plan to use the equity to supplement Social Security and other investment income streams
Have other assets and are not using this as a loan of last resort
Might not be able to access the cash you need in emergencies
Cons: These loans aren’t cheap, says Scott Withiam, housing counseling supervisor at American Consumer Credit Counseling, Inc. Plus, the industry that sells them has been under scrutiny from the Consumer Financial Protection Bureau for deceptive practices. “The reverse mortgage industry has had more than its share of shady operators who are drawn to all that equity that seniors have amassed,” says Reiss. “Homeowners considering a reverse mortgage should make sure to review the terms of the transaction with someone whose financial judgment he or she trusts.”
If you are interested in a reverse mortgage, make sure you know what you’re getting into:
There are additional costs to consider, including origination fees, mortgage insurance, and other closing costs, as well as servicing fees over the life of the mortgage.
Understand that the loan balance grows over time. As you get money through your reverse mortgage, interest is added to your monthly balance. That means the amount you owe grows as the interest on your loan adds up over time.
Remember the loan doesn’t wipe out homeownership costs. You must keep up with property taxes, insurance, utilities, and maintenance.
If you die while still in your home, your estate pays off the loan, which could mean less money for your heirs than was planned.
It may be cheaper to downsize instead or take out a home equity line of credit, which allows you to borrow funds on an as-needed basis against the equity you have in your home. It’s best suited for major expenses, such as home renovations or unexpected medical costs.
Be wary of proposals that encourage you to take out a reverse mortgage and use the proceeds to fund another investment vehicle. The costs associated with a reverse mortgage make it very unlikely that an investment will earn more interest than the cost of the reverse mortgage. Further, you may not be able to access the reverse mortgage proceeds from the investment to pay for homeownership costs.
You can also visit go.usa.gov/v2H or call 800-569-4287 and ask for a qualified reverse mortgage counselor.