What are the pros and cons of a reverse mortgage?

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A reverse mortgage is a mortgage loan that is targeted towards older homeowners and allows them to borrow against the value of their home. The borrower uses their home as the security, and they essentially borrow against the equity of the home so that they can receive a given amount of cash. When the loan ends, the estate serves as the vehicle of repayment.

Reverse mortgages have pros and cons. By understanding what they are, homeowners can make the best decision for their situation and lifestyle.

Pros of a Reverse Mortgage

A reverse mortgage can allow older homeowners to manage and pay for their expenses more easily. Oftentimes, older homeowners experience a considerable income reduction following retirement which can make it difficult for them to pay their bills and cover other expenses. A reverse mortgage can help alleviate this problem, by providing them with more funds.

Homeowners can remain in their home even if they take out a reverse mortgage. You will retain full ownership of your home with a reverse mortgage, so you can continue living in the home for as long as you choose.

In a reverse mortgage, you are protected if the balance of the loan exceeds your property’s value. Even though a reverse mortgage grows over time and could theoretically surpass the value of your home with time, the debt amount that must be repaid cannot be greater than the home value. 

Cons of a Reverse Mortgage

Reverse mortgages cost money. They are a type of loan, so there are lender fees and other costs associated with them. Additionally, reverse mortgages still require the homeowner to retain insurance on the property which will cost money. 

The balance of the reverse mortgage loan can grow over time, while the value of the home may decrease with time. Heirs will not be personally liable for the difference, as explained above, but it will prevent them from inheriting as much as the homeowner may have hoped for. If the loan balance does not exceed the property value, the inheritance amount passed on to heirs will still be considerably reduced.

The money that you receive from the reverse mortgage will likely affect your income and capital assessments. This is important to be aware of because it may determine the benefits and/or support that you receive from local government.

Reverse mortgages can be a great option for older homeowners, as it provides them with supplemental income. However, they can be complicated to understand so it is important to research and understand everything that a reverse mortgage will involve.