Reverse Mortgages – Pros and Cons

What is reverse mortgage?

With intent to keep older Americans in their homes, the Congress passed the Reverse Mortgage bill during 1988, which endorsed the Federal Housing Authority (FHA) and the United States Dept. of Housing and Urban Development to promise lenders who made home equity conversion mortgages. Classified under the category of specialized loans, individuals who are 62 years or older than that are bound to have this reverse mortgage loans available by their primary residence, and for a mortgage sum that provides a satisfactory equity so that at prime of life the loan may be reimbursed.

This type of loan can also be used on single family homes, condominiums and certain manufactured homes. The borrower is still responsible for other fees and should remain up to date on property taxes, homeowners insurance and homeowner’s association dues (if applicable).

In simple, reverse mortgage also known as home equity conversion mortgage is a type of loan that requires no monthly mortgage payments, however the borrower is held responsible for taxes and insurances that have to be paid for that particular mortgage. Now let us have a look at the pros and cons associated with reverse mortgages. 

Pros and cons of reverse mortgage

Pros:

• The homeowner can enjoy staying in the home without having to pay any monthly mortgage payments
• Heirs take over remaining home equity after paying off the reverse mortgage loan
• Legatee are not legally responsible if payoff balance surpasses home value
• Interest rates may be lower when compared to other available options
• Flexible payment options (i.e. monthly or line of credit)
• Exclusion of existing mortgage
• Proceeds are tax-free

Cons:

• The worth of property inheritance may diminish over time as proceeds are used up
• The concept of reverse mortgage is not well understood by many.
• Even though a reverse mortgage loan normally does not have an effect on eligibility for Social Security and Medicare, according to the extent to which it is needed government programs such as Medicaid may be affected.

Reverse mortgage guidelines

To be qualified for a reverse mortgage loan or Home Equity Conversion Mortgage, the Federal Housing Administration requires that you be a property holder 62 years of age or older, own your home out-and-out, or have a small mortgage outstanding that can be paid off at closing with profits from the reverse loan, have the fiscal possessions to shell out ongoing property charges together with taxes and insurance, and you must reside in the home.

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