What Are the Benefits and Drawbacks of Reverse Mortgages?

What Are the Benefits and Drawbacks of Reverse Mortgages?

If you've ever seen television, you've probably heard well-known personalities like actor Tom Selleck promote reverse mortgages as a beneficial tool for anyone approaching retirement. This financial solution allows property owners aged 62 and up to turn their equity in their home into spendable cash. While you will still owe money if you move or die, you will not have a monthly payment until then.

Important takeaways

A jumbo reverse mortgage can help you get tax-free income based on the equity in your house if you are 62 or older.

A reverse mortgage may provide you with greater flexibility in retirement and enable you to remain in your house. While there will be no monthly payment, you must pay homeowners insurance premiums, property taxes, and home upkeep expenditures or risk losing your home.

A reverse mortgage does not provide "free money." Before using this product, it is critical to thoroughly comprehend the advantages and cons.

Pros of reverse mortgages

You can better manage your retirement spending.

When many seniors retire, their income drops significantly, and monthly home payments can be their largest expense. With a reverse mortgage, you can boost your income while still paying your bills.

You are not required to relocate.

A reverse mortgage allows you to age in place (and maybe stay close to friends and family) rather than leaving your house. Furthermore, while a reverse mortgage has a cost, it may be less expensive in the long term than moving and either buying another property or renting in a different place.

The disadvantages of reverse mortgages

You must pay for it.

Reverse mortgage fees include lender fees (which are maximum at $6,000 and vary depending on the amount of your loan), FHA insurance premiums, and closing costs. These charges can be added to the loan total, but the borrower will have more debt and less equity as a result. You'll also have to pay monthly servicing costs, which can be as high as $35 if your interest rate changes on a regular basis.

You cannot deduct the interest from your taxes until the loan is paid off.

You may have taken advantage of the mortgage interest deduction when paying down your mortgage, but you will not be able to deduct the interest on a reverse mortgage each year. You'll only get that benefit if you really pay off the debt.

You may unintentionally breach other program requirements.

Simply put, a reverse mortgage may cause you to violate Medicaid and Supplemental Security Income (SSI) asset restrictions. This may have an impact on your eligibility for these benefits.