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Pros and Cons of Reverse Mortgages
Reverse mortgages offer cash-strapped seniors who want to keep their homes but need the money they have invested into their property to meet their financial needs as they enjoy their retirement. A reverse mortgage converts home equity into cash paid to the homeowner in a variety of ways, ranging from a home equity line of credit or a one-time payout.
While this may seem like the perfect way to utilize the equity in your home, there are some potential drawbacks. Understanding the pros and cons is the first step in making a sound financial decision if you find yourself in a position to potentially benefit from reverse mortgages.
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One of the obvious pros of a reverse mortgage is the access to cash that it brings. If other retirement funds are running dry and you need money for your day-to-day expenses, or if you face a sudden large expense, which you were not expecting, you may be living in your biggest source of cash: your home. Tapping into that equity through a reverse mortgage can mean the difference between just scraping by and enjoying a comfortable retirement.
A reverse mortgage is different from a home equity line of credit or second mortgage in that it pays you, and there are no monthly payments to make. This means that you do not have to feel strapped into a loan with required payments. Instead, the interest and principle on this loan is paid in a combination of upfront fees and interest charges that come due when the property is eventually vacated and sold.
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While reverse mortgages do appear to be a source of money for struggling seniors, there are some definite cons that you need to consider before pursuing this route. First, these mortgages are expensive even though they do not require a monthly payment. The upfront costs, which can be rolled into the loan and thus take away from the equity you have on your loan, are quite a bit more expensive than the closing costs on a refinance or home equity loan.
In addtion, you will pay interest on a reverse mortgage, and the amount of this cost depends largely on how long you hold onto your home after getting the loan. If you hold it for 20 years, you accumulate 20 years worth of interest charges. When the home is sold after you have moved on, those interest fees will come out of the sale price or will have to be paid if the home does not have enough value to cover the costs.
Using a reverse mortgage will take away from the value of your home. While you do receive some of that money right away to use for your expenses, when you add in the upfront costs and the interest, you may end up with little to show for the many years you have worked to repay your mortgage. If you were planning to leave the family home to your children or grandchildren, they may be left with little of value.
Some seniors do not know that a reverse mortgage can prevent them from qualifying for Medicaid because loan proceeds are considered an asset whereas untapped equity in your home is not as long as you are living in it. Each state’s Medicaid eligibility rules are slightly different, but if you are depending on this as your source of medical insurance, make sure you will not hurt your qualification by taking out a reverse mortgage.
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Read the Fine Print
If you do decide to pursue a reverse mortgage, always read the fine print carefully. Each lender has its own specific requirements, and some may not work well for you. For instance, some lenders will require you to pay your loan balance and accrued interest when you have to leave your home for a set number of weeks or months. Even if you have every intention of returning, you could have your home sold out from under you.
For seniors, this can be particularly problematic. Consider, for instance, if you have to go to a recovery home for an extended visit after a medical event, you could find that the mortgage is due before you are released. Since you have no way of predicting your medical future, avoid situations that could put you into this sort of distress.
When reading the fine print and learning more about the loan, ask questions. Find out what would happen if you had to suddenly go into a nursing home, or what your heirs will have to do to repay the loan after your death. Ask about Medicaid eligibility, and visit several banks to get quotes on the fees and interest. The bottom line is that the choice is yours, but you need to make an informed choice, not one fueled by misinformation and a panic about financial needs.
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Moore, Carol. Bankrate.com. "Pros and Cons of Reverse Mortgages." http://www.bankrate.com/brm/news/mortgages/20070104_reverse_mortgage_a4.asp?caret=4l.
HUD.gov. "Top Ten Things to Know if You're Interested in a Reverse Mortgage." http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/rmtopten.