Making Sense of Reverse Mortgages

By Credit.com

Reverse mortgages turn your home equity into a steady stream of cash. These hotly debated loans come with many pros and cons, however. Our credit experts give you some straight answers about reverse mortgages.

What is a reverse mortgage?
A reverse mortgage is a loan that allows elderly borrowers to access their equity without selling their home. With a reverse mortgage, the lender makes payments to the borrower – i.e. the reverse of a normal mortgage. The loan is repaid from the proceeds of the estate when the borrower moves or passes away.

Reverse mortgages can be extreme helpful for certain kinds of borrowers, but they are not be a good choice for everyone. Before you consider a reverse mortgage, you should fully research the terms, costs, and alternatives. The chart below highlights the main arguments for and against reverse mortgages:

Reverse Mortgage Positives	Reverse Mortgage Negatives
Provides a guaranteed source of tax-free income for the rest of your life.	Reverse mortgages can be very expensive. Costly fees, interest rates, mortgage insurance, and closing costs may apply.
Can choose to receive your money as a lump sum, monthly payment, line of credit, or combination of these ways.	Limited to borrowers 62 years old or older.
Allows you to remain in your home.	Reduces the home equity amount you leave to your children or grandchildren.
You cannot owe more than the value of your home at the time of repayment, no matter your balance.	You still remain responsible for paying property taxes, insurance, and repairs on your home. If you fail to keep up with these costs, you may be required to repay your reverse mortgage early.
You do not have to own your home fully in order to qualify for a reverse mortgage.	Any balance remaining on your first mortgage will be included in the balance of your reverse mortgage.
If the reverse mortgage balance is less than the value of your home at the point of repayment, your heirs get to keep the difference.	The loan has to be repaid when you die, sell your home, or no longer use it as your primary residence.
The loan can be repaid without selling your home.	Your heirs will have to pay off the balance plus interest when the loan term ends.
Reverse mortgage income will not impact your Medicare and Social Security eligibility.	May impact your ability to qualify for Medicaid and Supplemental Social Security benefits.
Ownership and title of the home remain in your name.	There are caps on how much you can borrow with most reverse mortgage programs.
You do not have to worry about making a monthly payment with a reverse mortgage as you would if were to borrow money through a home equity line of credit (HELOC).	A reverse mortgage is more expensive and binding that establishing a home equity line of credit.
Your credit score, savings, and income are not used in the loan calculation. Instead, your age, health, home value, and home equity are taken into consideration.	You are required to meet with a reverse mortgage counselor before obtaining the loan.
You can cancel the loan for any reason (right of rescission) during the three day period after your reverse mortgage closes.	After the three day period passes, the loan is final. Refinancing a reverse mortgage is difficult and costly.

To read more about reverse mortgages, visit the AARP, the US Department of Housing and Urban Development (HUD), or the Federal Trade Commission.

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