You may have even seen the Fonz (AKA Henry WInkler) pushing reverse mortgages on TV lately. However, you might have also noticed some news stories about vulnerable senior citizens who got in trouble with these types of reverse loans that allow you to get payments from your home while you still live there. Reverse mortgages can be good and bad, and it really depends upon your situation. If you do decide to explore this option to increase your retirement income, just be sure you put as much effort into researching it as you did when your originally shopped for a home and took out a mortgage to pay for it.
Are Reverse Mortgages Good or Bad?
First, understand what these are. They are a type of loan that is taken against the equity in your home. Instead of paying the loan back, you can receive payments for a period of time. Typically, the loan comes due if you ever more out of your home, and then the house has to be sold to pay the money back. This may happen after the borrower passes away or moves into assisted living or another home.
Advantages of Reverse Mortgages
There is no doubt that this can be the best solution for some elderly people. Typically, borrowers must be at least 62 years old. The good think about these transactions is that they are based upon home equity and market value, so people with credit problems can qualify. Here are some other advantages of reverse mortgages:
Flexibility: You can choose a lump sum, line of credit, or monthly payment. A line of credit helps you only use what you need, but a lump sum or monthly credit may be beneficial to some borrowers.
Income Taxes and benefits: According to the LongTermCare.gov page on reverse mortgages, the proceeds are not taxable income and will not stop you from qualifying for Medicaid if you spend the money you get in the month you get it.
Home ownership: You still own your home as long as you abide by the agreement, and you or your heirs can repay the loan and keep your house if you want.
Credit: Since these loans are calculated by the value of the home and equity in the home, people with poor credit can still qualify. In fact, the proceeds might be used to payoff debt that is causing financial problems with high interest rates.
Disadvantages of Reverse Mortgages
Reverse mortgages are not for everybody, and there may be some reverse mortgage alternatives that should be explored first.
Fees and closing costs. Like any other type of mortgages, these come with fees and costs that reduce the value of the amount that home owners can actually get out of their home. Also, you may have to pay for private mortgage insurance.
Responsibility: You still have to pay for home insurance, repairs, and taxes like before, and if you default on these obligations, you are in danger of having your loan closed, and you could lose your home.
Benefits: Rules may differ by your state, but you may be in danger of losing some benefits like Medicaid because of this extra income.
Are Reverse Mortgages a Good or Bad Solution for You?
Again, you need to do your homework and compare this solution to alternatives. Some alternatives to reverse mortgages may include refinancing, home equity loans, or simply selling your house and downsizing now. In themselves, these loans are not good or bad, but they can turn out good or bad.