When considering ways to pay for senior living, many seniors hope a reverse mortgage will be the perfect solution. Like most financial matters, however, there are reverse mortgage pros and cons that every senior should understand before signing on the dotted line. Although it is always best to work with a financial professional, here’s a look at some of the reverse mortgage pros and cons to help with decision-making.
A reverse mortgage is a loan, not a cash payout
Among the key reverse mortgage pros and cons is the fact that it is a loan, not a free payout. Even though it’s based upon the equity held in the home, the loan will eventually have to be repaid either by the homeowner if the house is sold or they move out, or by the estate after their death.
One of the most common types of reverse mortgages is the home equity conversion mortgage or HECM, which is insured by the Federal Housing Administration. Other financial institutions also offer reverse mortgages that are backed by the institution but not the federal government.
According to the Investopedia.com article, “What Is a Home Equity Conversion Mortgage (HECM)?,” the repayment amount also includes the reverse mortgage lender fees, as well as any interest accrued on the unpaid loan balance.
Qualifying factors for a reverse mortgage
There are also reverse mortgage pros and cons to qualification. In addition to living in the home as the primary residence, other requirements must be met. As noted in the Michigan.gov article, “Reverse Mortgages,” these include:
- Any borrowers on the reverse mortgage must be at least 62 years old.
- The outstanding mortgage must be paid off either before getting a reverse mortgage or after, using the money received from the reverse mortgage. So considerable equity in the home is often required.
In addition, HECM reverse mortgages require proof that the applicant has enough residual income to continue paying recurring costs like homeowner’s insurance, homeowner association fees, and property taxes throughout the term of the reverse mortgage. Those seeking a HECM reverse mortgage must also attend an information session by an approved federal Housing and Urban Development counselor.
On the upside, unlike a second mortgage, a reverse mortgage does not require a monthly payment because the loan payoff occurs after death, sale, or moving from the home.
Upfront and ongoing costs
Among the reverse mortgage pros and cons are the fees that must be paid at loan origination. These costs are dependent upon the type of reverse mortgage and the lender but are typically more than the costs of other types of home loans. As described in the consumerfinance.gov article, “How much does a reverse mortgage loan cost?,” initial costs generally include:
- Origination fees paid to the lender (up to $6,000).
- Loan closing costs that may include third-party payments for an appraisal, title search, surveys, inspections, recording fees, mortgage taxes, credit checks, etc.
- Upfront payment of a mortgage insurance premium (paid to the Federal Housing Commission).
Also among reverse mortgage pros and cons are ongoing costs, some of which are added to the loan balance each month. For HECM reverse mortgages, these may include:
- Lender service fees that cover account statements, loan distribution costs, and ensuring ongoing adherence to the loan requirement.
- Annual mortgage insurance premiums (equal to 0.5% of the outstanding mortgage balance).
These are in addition to the annual costs for homeowner’s insurance, HOA fees, property taxes, and for some, flood insurance. The larger the loan and the longer the term, the more will be paid in ongoing costs.
Other reverse mortgage pros and cons
Obviously, since a reverse mortgage requires seniors to live in the home as a primary residence, a reverse mortgage is not a viable solution for anyone planning to move to senior living in the short term. For those who need more income years before a move, a reverse mortgage may be a good idea, especially if the homes mortgage equity is high.
Another of the reverse mortgage pros and cons is that for those who plan to leave an inheritance to their children or others, it is important to understand that a reverse mortgage usually lowers the amount of inheritance available. One exception to this rule is those homes that continue to appreciate in value during the life of the reverse mortgage and are subsequently sold at a higher price.
For more information about reverse mortgages, check out the nerdwallet.com article “Reverse Mortgages: Pros and Cons.”
Learn more about paying for senior living in our article, “Clearing Up Misperceptions About Financing Senior Living.” For more information about Countryside, please call Margaret Nagel at (517) 206-5000 or download our brochure to learn about our care levels, cost, and amenities.
