No two retirements are the same, which is why a reverse mortgage may be ideal for some and not as advantageous for others. As you continue to explore your retirement options, add this list of reverse mortgage pros and cons for homeowners to assist you in deciding whether a reverse mortgage can help you achieve a better retirement—try to view them objectively with regard to your own situation.
Essentially, a reverse mortgage is a way for older adults, age 62 and over, to convert a portion of their home equity into cash that they can use at their discretion, and the loan for which they qualify does not have to be repaid for as long as they continue living in their home*.
Despite providing homeowners with cash, on top of eliminating their monthly mortgage payments, reverse mortgages are not for everyone. Rather, they work best when they are used responsibly and sustainably as part of an overall financial plan to help you meet your specific retirement needs and goals.
Reverse Mortgage Pros
With a reverse mortgage loan, you receive a defined cash amount and eliminate your monthly mortgage payments. Plus, your reverse mortgage loan does not have to be repaid until you sell the house, move out or pass away*.
*You must continue to maintain your home, pay your property taxes and homeowners insurance and comply with all loan terms.
The funds you receive are a loan, not income; therefore, they are not taxable. (Please consult your tax advisor for more information.)
You designate the disbursement plan that best meets your retirement goals. The proceeds from a reverse mortgage can be taken in a lump sum (60% the first year and the remaining 40% the following year), paid out over time in predictable amounts, or set aside as a line of credit that grows over time the longer it goes unused.
There are virtually no restrictions or requirements on how you can spend your loan proceeds.
Paying off large bills, consolidating debt, improving the home for comfort, safety and entertaining, protecting investments, covering long-term health care needs, starting a grandchild’s college fund, and creating a stronger safety net are just some of the responsible and strategic ways older adults are putting their reverse mortgages to work.
Neither you nor your heirs will ever owe more than your home is worth. No assets, other than the home itself needs to be used to pay off your loan balance.
Reverse Mortgage Cons
Con: A home with a reverse mortgage could go into default
As with a traditional mortgage, if you fail to keep up the home, pay your property taxes and homeowners insurance, or fail to comply with your loan terms, your loan could go into default. If you see this as a concern, you could set up an escrow account, known as a Life Expectancy Set-Aside or LESA, to ensure you can meet these ongoing obligations.
Con: You have to live in the home as your primary residence
You can’t use a reverse mortgage for a vacation or investment home. Also, if you live outside your home beyond a year, resulting, perhaps, from an extended nursing home stay or other life event, your loan could become due.
Con: You’re drawing down your equity
After a lifetime of building equity, your use of a reverse mortgage will likely start drawing down your equity. But if you’re using your home equity to provide you with more financial freedom and flexibility for a better retirement, then you may decide that this trade-off is well worth it. Your home also could be increasing in value, partly offsetting a growing balance.
Con: You may leave less for your heirs
Your heirs could actually see this as a positive, if your home equity allows you to live safely, comfortably and independently, giving them peace of mind that you have planned well and can continue to meet your financial needs without their assistance.
Regarding the pros and cons reverse mortgages raise, view them in the context of how they could impact your individual retirement needs and goals. Be honest and realistic about your assessments and projections. Are you someone who is never late paying your property taxes? Are your long-term health prospects good? Are you thinking about surprising your spouse with a memorable anniversary celebration?
As you move forward with your retirement planning, why not start your own pros and cons reverse mortgage list. In the end, your list of reverse mortgage pros and cons for homeowners could clearly point out the retirement road you need to travel. Cons that initially concerned you may no longer be an issue now that you fully understand them.
For more assistance, please consult your AAG professional. Over the years they have helped thousands of homeowners find the solutions they need for a better retirement.
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