In past years this product received a lot of negativity and many people were not interested in even hearing about the details, let alone agreeing to apply for a reverse mortgage. But there have been massive positive changes which now offer mortgage alternatives, especially for those with built-up equity. And the people with the most equity in their homes are primarily seniors. There is so much to know and understand concerning this product, so I will touch on just some of the important issues.
Benefits of Reverse Mortgages
- The homeowner can tap into built-up equity in the home by receiving immediate cash, lifetime payments or a line of credit
- Tenure payments provide a monthly income that will continue even if the homeowner outlives the actuarial life-expectancy tables.
- Neither the homeowner nor the heirs will ever owe more than the home is worth and the lender cannot seek other assets to make up for a shortfall.
- Money borrowed through a reverse mortgage is not taxable income.
- It may be better to tap home equity than to spend down other assets.
Here are some of the negative aspects:
- A reverse mortgage is not for a high-risk investment or one with a lower rate of return than that paid on the line of credit.
- Using the loan proceeds to purchase an annuity is not allowed.
- When the equity is less than 40%, the amount available will be insufficient to offset the costs.
- The costs outweigh the benefits if the borrower’s needs are short term.
- Since there is a residency requirement, a reverse mortgage cannot be used to pay for a nursing home stay of more than 12 months.
- If the borrower is in mortgage default this loan can be used to save the home but it must be used to pay off the outstanding mortgage.
This is a very detailed and sometimes complicated loan product so using a mortgage broker or lender who specializes in in reverse mortgages is highly recommended! WE have such lenders as our service providers and can get you in touch with them for any additional questions you might have.