Pros and cons of reverse mortgage

Posted on | By Divya Chauhan

The pros of Reverse mortgages are that It is Secured, Can stay in your home, and Don’t have to pay tax. The cons of a Reverse mortgage are You could experience the foreclosed, It is not free, and Complicated, There are several pros and cons of Reverse mortgages to consider when looking at their positives and negatives.

If you are a property owner and at least 62 years old, you can borrow against your equality to get cash or a line of credit from a lender. However, unlike a regular mortgage, you are not required to make monthly loan payments. You will repay the loan when you sell the house. A home equity conversion mortgage (HECM) is the most typical sort of reverse mortgage. These loans are backed by the FED (Federal Housing Administration). Borrowers pay an insurance premium in order to participate, which is used as the FHA fund reserve. These reserves are used to reimburse the lender in the event that a borrower fails to repay their loan. Now, you understand the meaning of reverse mortgages. You can check out the pros and cons of a reverse mortgage to better understand the topic.

Pros of reverse mortgage 

1. It can help to secure your retirement. 

Reverse mortgages are a great option for retirees who do not have a lot of cash savings or investments but do have a lot of wealth in their homes. A reverse mortgage allows you to convert an unusable asset into cash that you can utilize for expenses in retirement.

2. You can stay in your home. 

You can continue to live in your home and still receive cash from it. Additionally, you do not have to sell it in order to liquidate your asset. This implies that if you are looking to relocate, you would not have to worry about being priced out of your community.

3. You don’t have to pay tax on the income. 

The money you get from a reverse mortgage is regarded by the IRS as a loan advance rather than as income. As opposed to other retirement income like distributions from a 401(k) or IRA, the funds aren’t taxed.

4. You are protected if the balance exceeds the value of your home. 

The worth of your home could turn out to be lower in some circumstances than the entire amount payable on the reverse mortgage. If this happens, the remaining amount is not a concern for you.

5. You will pay off your current home loan. 

A reverse mortgage can be obtained even if your home is not completely paid off. You are able to pay off an existing mortgage with the money from a reverse mortgage. Thus, you can use the money for other expenses.

Cons of reverse mortgage

1. You could experience the foreclosed. 

It can appear hard to foreclose on a reverse mortgage because no monthly principal and interest payments are necessary. Foreclosure can occur if you fall behind on your HOA dues, homeowner’s insurance, or property taxes.

2. It is not free. You have to pay for it. 

A reverse mortgage may not require you to make payments, but there are still a lot of costs involved. You have to pay an upfront insurance cost in addition to your regular taxes, insurance, and HOA dues. This is typically 2% of the appraised value of your house. At closing, you will additionally pay origination costs. You do have the choice to add these expenses to your loan balance, but doing so will reduce the amount of money you get.

3. Your other retirement benefits may be impacted.

A reverse mortgage may not be taxable income, but it may still affect your eligibility for other need-based government programs like Medicaid or Supplemental Security Income (SSI). A benefits expert should be consulted to ensure that your eligibility won’t be compromised.

4. Reverse mortgages are complicated. 

Reverse mortgages are subject to several restrictions and limitations. These loans have a lot of risks, which might not be worth the extra money. Any offer for a reverse mortgage should be avoided unless the details are thoroughly understood.

5. Until you have paid off the loan, you cannot deduct the interest from your taxes.

As you were paying off your mortgage, you could have benefited from the mortgage interest tax deduction, but you won’t be able to deduct the interest on a reverse mortgage each year. The benefit is only available if you are truly paying off the debt.

Explore more information: 
  1. Fixed Rate Mortgage – Pros and Cons
  2. Conventional Loan – Pros and Cons
  3. Student loan forgiveness – Pros and Cons

Thank you for reading this article. If you have any queries regarding our article on the Pros and Cons of Reverse Mortgage then do comment in the comment section below.

 

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Divya Chauhan
Divya Chauhan is an expert writer with 10+ years of experience as a content writer. They specialize in making complex topics like IT, Health, and general topic easy to understand. Divya has written over thousands of articles to help people with their content. Prior to joining Way2benefits’s editorial team in 2020, Divya worked as a Professor of BCA college and freelancer blogger.

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