January 16, 2019 by HECM Pro
Like any financial product, there are some pros and cons of a reverse mortgage that can make it a great option for some seniors and a less than great option for others. A HECM reverse mortgage isn’t necessarily the perfect solution for everybody, but for those that it is, it can be a fantastic option. Whether or not it makes sense for you depends on your financial goals and situation.
Before I dig into the pros and cons of a reverse mortgage, let me first go over what a reverse mortgage actually is. There is a lot of misinformation out there about the program, so I want to set the record straight.
What is a HECM Reverse Mortgage?
So, what is a HECM reverse mortgage? The most popular reverse mortgage in the United States today is the federally-insured home equity conversion mortgage, or HECM. If anybody you know recently got a reverse mortgage, chances are it was a HECM.
The HECM is a unique home loan designed to give seniors 62 or older access to a portion of their home’s value without a mortgage payment or giving up ownership of the home.
Reverse mortgage borrowers commonly use the proceeds to get rid of existing mortgage or other debt payments, finance home improvements, and supplement existing retirement income or assets.
No monthly payments are required as long as at least one borrower is living in the home and paying the required property charges (property taxes, homeowner’s insurance, HOA dues, etc.).
You always remain the owner of the home and you’re free to leave it to your heirs, who can inherit the remaining equity in the home.
The HECM reverse mortgage is non-recourse, which means the most that will ever have to be repaid is the value of the home. If the home isn’t worth enough to settle the entire balance, FHA will cover the shortage out of its mutual mortgage insurance fund.
Reverse Mortgage “Pros”
A reverse mortgage is a great program, but it’s not perfect for everybody. There are some pros and cons, depending on your goals and financial situation.
Let’s start off with some of the obvious positives, then we can take a look at the possible negatives. The reverse mortgage offers some great benefits, including the following:
- No monthly payment. Though it’s a home loan, it’s one that doesn’t require a monthly payment as long as you pay required the property charges and live in the home. Because no payment is required, you can use reverse mortgage proceeds to completely eliminate other debt payments, such as mortgages, credit cards, car loans, student loans, medical bills, etc. No other home loan program does this.
- You remain the owner of your home. Contrary to a common misconception, you always remain the title owner of your home. You not only get access to your equity with no payment, you get to keep ownership of your home to boot!
- No income tax liability. This can be a huge advantage for retirees living on IRAs, 401Ks, or any other type of taxable retirement asset. Proceeds from a reverse mortgage are income tax free. A reverse mortgage can provide an additional income source, which helps you preserve your lifestyle and reduce your income tax bill.
- Can be used to supplement retirement assets. If you have little or no mortgage balance, the reverse mortgage can be structured as a tax free retirement “account” that will grow and compound over time with no limit. This can supplement your existing retirement assets and help ensure that they last at least as long as you do.
- Less stringent qualifications. Though lenders are required to do a financial assessment as part of the qualification process, a reverse mortgage is easier to qualify for than other loan programs. Even if you have some dings on credit, you may still qualify.
- The most that will ever have to be paid back is the value of the home. The HECM reverse mortgage is a non-recourse loan, which means that the most that will ever have to be paid back is the value of the home. If there’s not enough value in the home to pay back the entire balance, you, your heirs, and your estate are not on the hook for the shortage.
- The program is highly customizable. There are a lot of options for structuring the reverse mortgage, which means it can be tailored to your specific financial needs and goals. Reverse mortgage borrowers can receive the proceeds as a term or tenure payment, line of credit, lump sum, or some combination of all.
- Converts your equity into a resource that can be used to fund your retirement lifestyle. You can’t take your equity down to the store to buy a steak, right? The reverse mortgage enables you to convert home equity into cash that can be used to improve your lifestyle and financial security in retirement.
Reverse Mortgage “Cons”
Because the reverse mortgage is so versatile and customizable, it offers the ability to meet a wide range of financial goals. However, it’s not necessarily a perfect fit for everybody. The following are some of the possible “cons” of the reverse mortgage:
- High fees for some borrowers. Depending on the scenario, the fees for a reverse mortgage can be steep. I’m not saying they will be steep, only that they can be for certain scenarios, such as when you have a large mortgage balance to pay off. Typical fees include title insurance, escrow, appraisal, credit report, government recording, tax stamps (where applicable), counseling, origination, etc. FHA also charges a one-time mortgage insurance premium (IMIP) . Though the fees can add up to thousands of dollars, the vast majority can typically be rolled into the new loan amount, which means they don’t need to be paid out of pocket.
- Depletion of equity. I wouldn’t call this a “con” per se; it’s more a question of suitability. The whole point of the reverse mortgage is convert your equity into cash, so if your goal is to preserve as much equity as you can (to pass on to heirs, for instance), then the reverse mortgage is probably not a good fit. Though the reverse mortgage is designed to convert equity into cash, it also preserves equity. It’s not a healthy program if it uses all of your equity quickly, so barring any huge drops in home values in your area, it’s a good bet you’ll have a significant amount of equity in your home for many years to come.
- The loan balance can grow rapidly in later years. A reverse mortgage is a home loan, so interest accrues on the balance on an annual basis – just like any other home loan. If you don’t pay the interest, it’s considered a loan advance and tacked onto the balance. This means that interest can accrue on interest over time, which means the balance can grow rapidly in the later years of the loan. Having said this, don’t assume this is some kind of dirty secret lenders don’t want you to know. Lenders are required to disclose projections that show estimated loan balance growth over time, so it’s no so much a “con” as it is a question of suitability.
- There is some income and credit qualifying today. FHA rolled out new financial assessment guidelines back in 2014 that make it tougher for seniors to qualify for a reverse mortgage than in the past. It is still much easier to qualify for than a traditional forward home loan, but not as easy as it used to be. Not everybody qualifies today.
Every financial product has it’s pros and it’s cons – and the reverse mortgage is no different. However, it can be a great financial solution for the right person. It’s important to evaluate the total package of “pros” and “cons” with a good reverse mortgage professional to determine if it’s the right solution for you.
How Much Money Can I Get?
How much you qualify for depends on the value of your home, the age of the youngest borrower, and what program you select (fixed rate or variable rate). To get an idea of how much you might qualify for, check out our free, no-strings-attached reverse mortgage calculator.