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Pros and Cons of Reverse Mortgages
Over the last decade, reverse mortgages have been aggressively pitched in TV ads as an easy way for seniors to cash in their home equity to pay for living expenses. However, for many, improper use of the product — such as pulling all their cash out at one time — has led to significant financial problems later, including foreclosure.
In actuality, there are some cases where reverse mortgages can be helpful to borrowers. However, it’s essential to do extensive research on these products before you sign.
Reverse mortgages are special kinds of home loans that let borrowers convert some of their home equity into cash. They come in three varieties:
- Single-purpose reverse mortgages. Offered by some state and local government agencies and nonprofit organizations, these are aimed at low- and moderate-income borrowers. They are not available everywhere and can be used for only one purpose, such as home repairs, improvements, or property taxes.
Who can apply? Homeowners can apply for a reverse mortgage if they are 62 years old, own their home outright or have a low mortgage balance that can be paid off with the loan proceeds. Qualifying homeowners also must have the financial resources to pay for upkeep, taxes and insurance and live in the home during the life of the loan.
Consider the following pros and cons as a starting point for trying or bypassing this loan choice. Even though HECM loans require a discussion with a loan counselor, you should bring in your own financial, tax or estate advisor to help you decide.
Pros of reverse mortgages:
- They’re a source of income. Borrowers can select that the amount of the loan be payable in a lump sum or regular payments.
Cons of reverse mortgages:
- You may outlive your equity. Reverse mortgages are viewed as a “last-resort” loan option and certainly not a singular solution to spending problems. They’re recommended generally for older seniors as part of a strategic package of financial solutions to allow them to stay in their homes as long as possible.
The courts have recently put a stop to one of the most onerous problems with reverse mortgages. In October 2013, a Washington, D.C. federal court judge struck down a U.S. Department of Housing and Urban Development (HUD) policy allowing lenders to demand that surviving spouses immediately repay reverse mortgage loans when their spouse dies. Many widows and widowers were forced into foreclosure before this decision.
If you’re considering a reverse mortgage, do some reading. The following agencies offer more extensive pro-and-con information on these products:
- The Consumer Finance Protection Bureau . The CFPB is a U.S. government agency dealing with consumer protection issues in the financial sector.
Bottom line: Reverse mortgages have become a popular and controversial loan option for senior homeowners. For some, these products may work well in special situations. However, every applicant should do extensive research and receive individualized financial, estate and tax advice in advance.
Jason Alderman directs Visa’s financial education programs. To follow Practical Money Skills on Twitter: www.twitter.com/PracticalMoney
The Internet has turned me into a hardcore comparison shopper, and apartments are no different. There are dozens of apartment rental sites listing dozens of properties in my hometown. It pays to check out several of these sites when you’re looking for a new pad. I mentioned a few sites you should use (and a few you shouldn’t) in The Best (and Worst) Apartment Rental Sites. But don’t stop your search with your computer. I found my last apartment through a “For Rent” sign in the window. The place was $150 cheaper than anything else I found, and I never saw an online ad for it.
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Pros and Cons of Reverse Mortgages
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