A reverse mortgage is a non-recourse loan secured by a house. Unlike a conventional mortgage that decreases over time, a reverse mortgage increases over time. It can be used as a form of mortgage debt consolidation. The amount that the borrower can borrow is based on the value of the home, interest rates, and the age of the homeowner. Older homeowners can borrow more than younger homeowners, since it is assumed that the reverse mortgage will be repaid sooner.
Reverse mortgages are designed for older homeowners who are "house rich, but cash poor." With a reverse mortgage the homeowner borrows money, but does not have to repay it as long as they live in their house.
Each month interest is added to the principal amount of the loan, and when the homeowner moves, they either repay the loan, or the house is sold and the proceeds go to the reverse mortgage lender
To qualify for a reverse mortgage, the borrower (and their spouse if married) must be 62 years of age or older, and they must own their primary residence, which will serve as security for the loan.
What are the advantages of a reverse mortgage?
The advantages of a reverse mortgage are:
- the borrower can remain in their home, allowing them to remain independent;
- the proceeds from the reverse mortgage are generally tax free -reverse mortgages are flexible; payments can be received as a lump sum, or as monthly payments for life.
- no repayments are necessary as long as the homeowner lives in the home.
- in most cases reverse mortgage proceeds will not affect regular Medicare or Social Security benefits
- the borrower's credit rating doesn't matter; only the value of the home is important.
- no payments are required as long as the homeowner lives in the house.
- it's a good way to unlock the equity in a house, to allow the homeowner to remain in their house.
- the proceeds from the mortgage can be used for any purpose.
- reverse mortgages are non-recourse, so even if house prices drop in the future, or interest rates increase, the homeowner cannot be forced from their home.
If paying down a mortgage makes sense, why would you want to use the home equity you have built up to increase your mortgage with a debt consolidation loan?
What are the dis-advantages of a reverse mortgage?
The disadvantages of reverse mortgages are that: -
- reverse mortgages are much more expensive than traditional mortgages
- when the home is sold, it is possible that there may be no equity remaining, so heirs may not realize anything from the sale;
- reverse mortgages are a form of debt; many older people want to avoid debt, particularly as they get older;
- reverse mortgages must be paid off upon the death of the homeowner, or if the borrower has not lived in the home for 12 months. This could be an issue if the borrower is placed in a nursing home and then recovers, only to find the home sold.
- While regular Social Security and Medicare benefits are not affected, other programs such as Medicaid and Supplemental Security Income (SSI) may be affected.
- there are significant up front costs, so reverse mortgage are generally only a good idea for people who intend to live in their homes for at least five years
- since the proceeds can be used for any legal purpose, it is important that the borrower does not use the proceeds for frivolous purposes, like unnecessary vacations or other items.
If you have a lot of debts, like credit cards, a reverse mortgage could be used as a form of debt consolidation to repay those debts.
However, a reverse mortgage debt consolidation loan isn't for everyone. You must be over 62 years of age, own a home with some home equity, and you should plan to live in your home for at least another five years.
It is important to research your options and decide if a reverse mortgage is right for you.