Reverse Mortgage Pros and Cons

Reverse Mortgage PROS

• A reverse mortgage is an excellent option for seniors who own their own home and want to extract equity from it in the form of cash. HUD’s Home Equity Conversion Mortgage (HECM) requires the lender to offer a reasonable interest rate and while closing costs are substantial, the loan origination cost is by law capped at 2%.

• No payments are made on a reverse mortgage until the home is sold, either by the owner/borrower or the estate.

• If the value of the home is less than what is owed on the reverse mortgage, HUD will make up the difference. There is no debt responsibility that falls to heirs or descendants.

• The revenue received on a reverse mortgage is looked on as an advance on a loan and therefore is not taxable.

• Under the terms of a HUD approved mortgage the homeowner can never be forced out of his or her home. They are guaranteed the right to remain there until they pass away or until they decide to sell the home and move.

• HUD insists that any federally insured reverse mortgage agreement be preceded by a counseling session that includes the potential borrowers and an approved housing counselor. Reverse mortgages are not cheap and they can be complicated, so it’s critical that homeowners understand what the ramifications of the loan can be.

• IF your reverse mortgage is in the form of a line of credit, the unused portion earns interest equal to the interest rate that is charged for the reverse mortgage itself.

Reverse Mortgage CONS

• A federally insured reverse mortgage – one approved by HUD – currently tops out at a little over $362,000. If the loan applicant lives in the San Francisco area, this amount is 50% or less of the median home price in the market. Reverse mortgages often don’t allow seniors to access all of their equity, or even most of it.

• The cost of obtaining a reverse mortgage is extremely high. Under the HUD program, loan origination costs are 2% of the loan and an initial insurance fee of 2% of the loan’s maximum for the housing region. An additional .5% in insurance costs is tacked on annually. A reverse mortgage may cost $10,000 or more to originate. Since the cost is financed by the loan, its impact is minimized.

• The interest on a reverse mortgage is tax deductible, but only when the loan is paid back – a task that often falls to the heirs and estate referees and does the mortgagee no good.

• For low-income seniors who depend on Medicaid and Supplemental Social Security (SSI), they must not receive more in monthly reverse mortgage payments than they’re going to spend. Money from a reverse mortgage that sits in a bank account may put a retiree over the allowable limit for liquid assets set by the assistance programs that they rely on to stay afloat.

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