The Pros and Cons of a Reverse Mortgage
Reverse mortgages are less frequently discussed than other types of real estate loans. While a useful tool for those in the correct circumstances, many people – including both investors and homeowners – don’t fully understand the ins and outs of how this tool can be used. While not the best option for everyone, particularly for those with short term ownership in mind, a reverse mortgage can be extremely valuable when properly utilized.
Financing, including the use of reverse mortgage, is a personal choice with appropriateness that varies based on circumstance. When considering a reverse mortgage, it’s important to know how the process works, as well as all of the relevant pros and cons.
What Is a Reverse Mortgage?
A reverse mortgage is a tool that allows borrowers to use the equity in their home as collateral against a loan in a way similar to a traditional mortgage. But unlike a standard mortgage, borrowers do not have to make monthly payments. Instead, the loan is to be repaid in full when a maturity event occurs, which generally happens when a borrower sells the home or otherwise no longer owns the property. In addition, borrowers who take out a reverse mortgage still hold the title to their home.
A reverse mortgage can be a great option for those who need to access home equity for one reason or another, any expenditure of your choosing: to supplement income, or for health care, repairs, debt service, travel, and so forth.
However, not everyone is eligible for a reverse mortgage. Some highlights of the qualifications for property owners for a reverse mortgage include:
- At least 62 years of age or older.
- Own the property in full or have a single lien that can be repaid with the proceeds of the reverse mortgage.
- A single-family home intended to serve as a primary residence, a multi-unit property with no more than four units, FHA-approved condominiums, Single Unit Approval, or new construction.
- Remain current on property taxes, insurance, and any other legal obligations included in home ownership, like HOA dues.
A loan officer will walk you through your options and all requirements.
Many property investors do not meet these requirements in full – for example, many investors are under 62 years old or have no interest in borrowing against a primary residence – but for those who need cash to take advantage of a great opportunity in the investment market and who do meet the requirements, a reverse mortgage can be an excellent choice.
Pros and Cons of Reverse Mortgages
As with all financing tools, reverse mortgages have both pros and cons that should be carefully considered. Before making a determination about whether you should pursue a reverse mortgage, be sure you understand all of the applicable pros and cons of reverse mortgages.
The Pros of a Reverse Mortgage
Reverse mortgages have many advantages that borrowers should strongly consider when making financing choices for an investment property. Below are some of the most significant advantages of a reverse mortgage.
An Available Source of Funding for Those Who Qualify
Accessing capital from a home isn’t always easy. However, a reverse mortgage greatly simplifies this process. For those who qualify, a reverse mortgage can be a compelling option with fewer hoops than other forms of lending. Rather than struggling to secure a mortgage on an investment property or trying to raise cash, a reverse mortgage allows you to tap into a resource you already own.
You Retain the Title
In a traditional mortgage situation, the bank holds onto the title of a home until the loan is repaid in full. In that scenario, the bank technically owns the home as they provided the majority of the funding. If obligations aren’t repaid, the bank is allowed to claim the home.
However, with a reverse mortgage, the homeowner retains the title. This is an important distinction, as it ensures that homeowners always maintain ownership without lender involvement. While lenders can claim property should a borrower default, the title remains in the hands of the property owner.
Few Caps on Spending
While single-purpose reverse mortgages do limit how funds can be used, private reverse mortgages do not. This means that you can borrow against your home equity for any purpose you choose, whether that’s spending for your family or putting funds toward investment opportunities.
No Monthly Payments
Making monthly payments on a loan can be a major downside to traditional borrowing. This is especially true for borrowers who need access to cash for investment purposes but don’t expect to see profits for a long while. Without the requirement of monthly payments, reverse mortgage borrowers can feel a little less pressure when using their cash in ways that will pay off down the road rather than immediately.
Numerous Borrowing Options Available
Reverse mortgages aren’t all made equal. There are numerous borrowing methods available to those who choose to use a reverse mortgage, including:
- A lump sum payment that can be used for big purchases
- A line of credit that can be used as needed
- Ongoing monthly payments for a set period of time
- A combination of lump sum, credit line, and monthly payment options
This variety of choices gives borrowers the flexibility to find the right fit. Further, these options go beyond what a traditional loan provides, offering additional advantages to those with unique financial needs.
Proceeds May Not Be Taxable Income
Unlike income earned in other ways, the proceeds of reverse mortgage loans are generally not considered taxable income. This provides a way to access cash for personal use without taking tax consequences into consideration.
Reverse Mortgages Are Non-Recourse Loans
While no borrower wants to consider the ramifications if a loan can’t be repaid as promised, this occasionally does happen. For example, borrowers may find themselves in a situation in which cash doesn’t adequately meet repayment requirements or may unexpectedly pass away before obligations can be met. A non-recourse loan, however, makes the best of a bad situation.
While property can be seized if a borrower defaults on a reverse mortgage loan, lenders can’t go after heirs or any other responsible party if the value of the property no longer covers the full amount of the loan (including interest and fees). For example, if the home value decreases over the life of the loan, a bank can seize the property but cannot demand additional payment to make up the difference between home value and loan payoff amount.
The Cons of a Reverse Mortgage
While reverse mortgages offer excellent funding opportunities under the right circumstances, they aren’t for everyone. There are some cons associated with reverse mortgages that borrowers should keep in mind before attempting to move forward.
The Age Requirement
Reverse mortgages, as common tools for retirement funding, are only available to borrowers over the age of 62. While this factor is irrelevant for those over this age limit, it blocks access for younger borrowers. Borrowers who are currently too young to qualify may have this as an option in the future, but that’s not valuable when financial resources are required in the present.
Interest and Fees Still Apply
Reverse mortgages may work differently than standard loans, but they’re still loans, which means interest and fees apply. For borrowers who choose a line of credit option, for example, the impact of interest may be less significant, but it’s certainly something to consider for those who prefer the lump sum option. If the loan goes unpaid for years, the accrued interest could make repayment obligations far larger than anticipated.
Fees on a reverse mortgage can also be higher than those that accompany conventional mortgages.
All Obligations Must Be Kept Current
One requirement of a reverse mortgage is to stay up to date on all payments for property taxes, insurance payments, and any other applicable costs, like HOA fees. For most borrowers, a reverse mortgage will come due when the property is no longer owned, but for those who accidentally miss a payment, a reverse mortgage could come due sooner than expected. This can also be the case if a property is not properly maintained and kept up to code.
For property owners who are always up to date on obligations, however, this isn’t necessarily of any consequence. Regardless, property owners should pay careful attention to due dates and loan requirements to avoid inadvertently triggering a maturity event.
Should You Use a Reverse Mortgage?
As with all financing choices, there’s no one right answer. For some investors, using a reverse mortgage may not be of interest due to involving one’s own home as collateral for a loan. For others, there may be more appropriate sources of funding immediately available. And for others still, the qualifications may disqualify them from borrowing – many investors, for example, aren’t yet 62.
However, a reverse mortgage should never be immediately ruled out or disregarded without the proper due diligence. If you are over 62 years old and own a property that qualifies for this lending program, it may be well worth it to consider financing with a reverse mortgage. While it won’t be a great choice for everyone, it will be the right option for some.
Savvy investors are aware of all of their potential funding sources, and that includes a reverse mortgage. This financial tool won’t be ideal for all investors, whether now or in the future, but under proper circumstances, a reverse mortgage can be a pipeline to available cash that will make purchasing a new property or paying for repairs and renovations – or providing funding for any other life expense or investment – fast and easy.
We offer Reverse Mortgages! Apply for a Reverse Mortgage today and our professional loan officers will walk you through options that fit your specific needs.