Pros and Cons of Reverse Mortgages

As people reach retirement they often find their homes hold considerable value. A reverse mortgage allows these people to tap into this equity to fund unexpected bills, home improvements or just to supplement retirement income. But just like traditional bank equity loans there are both pros and cons when taking out a reverse mortgage.

What are the benefits?

1.You don’t have to make regular repayments.

One of the key benefits of reverse mortgages is that no regular repayments are necessary. Any stress and worry regarding meeting regular mortgage payments do not exist with reverse mortgages. Instead the debt accumulates and is paid back when your home is sold.

2.You still own your home (and can’t lose it)

Having a reverse mortgage allows you to retain ownership of your home. It gives you an option if you don’t want to sell and downsize to access extra money. A reverse mortgage gives you the choice to stay in your home and access extra money by borrowing against your home. Keeping ownership also allows you to gain the benefit from any appreciation in your homes’ value. And just as important, due to the structure of reverse mortgages you can never owe more than what your house is worth.

What are the drawbacks?

1.Less money for your heirs.

If you want to leave your home to your children then taking out a reverse mortgage would mean that your children would have to repay your loan first. In the case that they could not do this, then the home would be sold to repay the loan. Therefore, one of the biggest potential drawbacks exists when you want to leave something in your estate for your children or heirs. If you take out a reverse mortgage then the amount your heirs receive is what’s left after the reverse mortgage has been repaid.

2. Loss of equity in your home.

Interest charges, monthly fees and insurance premiums are all added to the total advance to calculate the total amount to be repaid. The larger the advance and the longer the loan is active means that there is a higher possibility that eventually the majority of the equity in the home could be lost.

3.Fees and other costs.

Upfront costs and fees, including insurance premiums and monthly fees mean that taking out a reverse mortgage for the short time is not cost effective. If you are planning to move within several years of taking out the reverse mortgage remember that the loan, including fees and interest charges must be repaid. This may affect your ability to purchase another home.

4. Monitoring the additional money.

Having access to large amounts of cash can be dangerous or overwhelming in situations where the person is not thinking clearly. Trusted family members may need to monitor the situation to ensure that money isn’t being spent wastefully, especially as the person advances in years.

Your local bank or mortgage advisor should be able to provide you will more detail advice customized to your current situation. And like all major financial decisions you should always take the time to think it over and talk with your financial advisor and attorney first.