Reverse Mortgages Pros and Cons

by admin on 06/11/09 at 7:05 am

If you are a senior who has owned your home for awhile and are thinking about your next financial step, it is important to consider reverse mortgages pros and cons. These types of loans can be a great option for many people over age 62 who want to tap into their home’s equity without selling it. But like all financial products, it is important to understand what you are getting into with the reverse mortgage.

Reverse mortgages, also known as a Home Equity Conversion Mortgage or HECM loan, allow you to take money out of your home without the burden of a monthly payment. These types of loans are safe and government-insured by the Federal Housing Administration (FHA), a division of the Department of Housing and Urban Development (HUD).

Probably the biggest “pro” in reverse mortgages pros and cons is the fact that seniors who use these loans can live the rest of their lives in a home with no mortgage payments. There are no credit checks and your home can be financed or owned free and clear to qualify for this program. As a borrower you can choose to get your money out in one lump sum or as a line of credit. Unlike typical home equity lines of credit, a reverse mortgage line cannot be closed if your income or property’s value dips.

Of course, when you are thinking about reverse mortgages pros and cons there are always pitfalls and disadvantages to this type of loan. First, reverse mortgages tend to be quite expensive. There are numerous fees and insurance costs associated with reverse mortgages and in some cases homeowners could be paying as much as $18,000 in up-front payment. These fees are usually added to the loan balance so you will not have to pay them out of pocket, but you will be paying interest on that extra amount, so it can get expensive over time.

In the reverse mortgages pros and cons balance sheet, another “con” is the effect that receiving the extra money can have on your eligibility for certain programs. If a large lump sum gets added to your bank account as a result of a reverse mortgage you may no longer be eligible for Medicaid and other need-based programs. Also, when you have a large sum of money in your account you become a potential target for scammers who want to sell you bad investments, so beware.

If you are considering taking this step keep in mind the reverse mortgage pros and cons discussed here. Reverse mortgages can be a great option for some seniors, but only proceed once you know exactly what you’re getting yourself into.