Pros and Cons of a Reverse Mortgage

Pros and Cons of a Reverse Mortgage

Feb 8, 2014 at 12:00PM

Farm

Flickr source

After years of pouring money into their homes, during their senior years borrowers can use reverse mortgages to take some cash out. The money can be a welcome supplement to Social Security payments, while allowing older people to keep living in their homes. Is  a reverse mortgage right for you?

What is a reverse mortgage?
There are three types of reverse mortgages:

  • Proprietary private loans backed by the financial firms that developed them
  • Single-purpose reverse mortgages that some local government agencies and nonprofit organizations offer
  • The Home Equity Conversion Mortgage (HECM) run by the Federal Housing Administration (FHA) which is the most popular

HECMs allow participants to borrow against some of the equity in their homes.Unlike a traditional Home Equity Line Of Credit (HELOC), there are no monthly payments. Instead, borrowers get paid. When the borrower no longer lives in the home, the cash and interest must be repaid to the lender. During the life of the loan, borrowers keep title to their homes.

To qualify for a reverse mortgage, homeowners must be at least 62 years old.They have to own their homes outright or have such a low balance on the existing mortgage that it can be paid off with the new loan. Homes that qualify must be single family or a two- to four-unit homes with one apartment occupied by the buyer. Some U.S. Department of Housing and Urban Development-approved condominiums or manufactured homes also qualify for a HECM.

The amount of money borrowers can get depends upon the current interest rate, the premium on mortgage insurance, and the age of the borrower. If there is more than one borrower, the age of the younger one is used. In general, the more equity the borrower has and the older she is the more money she can get.The FHA has capped reverse mortgage limits at $625,500 or the selling price of the home.  The loans don't have income requirements. The disbursements are not taxable.

Borrowers can get payments as a lump sum, equal monthly payments over a fixed period of months, a line of credit or a combination of these options. If the borrower receives more money than the home is worth, she will never owe more than the value of the home.

The FHA requires participants to meet with an approved HECM Counseling Agency prior to applying for a reverse mortgage. This counseling is low-cost or free.

Cons of a reverse mortgage
A reverse mortgage could have a potential impact on the borrower qualifying for means-tested government programs like Medicaid or Supplemental Security Income, especially when the disbursement is taken as a lump sum.

Lenders charge loan origination and other fees. The loans usually have variable interest rates tied to short-term indexes like the London Interbank Offered Rate (LIBOR). Interest cannot be written off until the loan is repaid. Debt increases as the equity in the home is depleted. Fewer assets are available to leave to the borrower's heirs. Participants must still pay utilities, homeowners insurance and property taxes.

Prior to your mandated counseling session, prepare a budget and a list of questions. Don't sign anything until you fully understand it. A reverse mortgage could potentially make a big difference in how comfortably you live during your senior years.

One stock you need to know
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

This article originally appeared on MyBankTracker.com

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers