Learn the Pros & Cons of Reverse Mortgages and Alternatives
Reverse mortgages are not suitable for everyone. Homeowners should choose them only if they want to stay in the property for several years, and there is no other option to receive the money they require. Before you take out a reverse mortgage, weigh the benefits and drawbacks.
Pros of Reverse Mortgages
1. It is simple to qualify
In comparison to the standard “forward” mortgage approval and underwriting, qualifying for a reverse mortgage is quite simple. Because you do not make monthly payments to your lender during the term of the loan, your lender is less concerned about your ability to repay, which means your credit score is less significant. Even if you have poor credit, a reverse mortgage lender would almost certainly accept your Home Equity Conversion Mortgage (HECM).
2. Even with subprime credit, rates are competitive
Borrowers with subprime credit are paid substantially higher interest rates and costs on most mortgage products, assuming they can acquire financing at all. With a HECM, this is not the case. Borrowers with bad credit pay the same interest rate as those with near-perfect credit.
3. The proceeds of a reverse mortgage are not taxable income
If you receive a $1,250 payout from your reverse mortgage loan, you keep the entire $1,250. Because reverse mortgage funds are not considered income, the government does not collect income taxes on them. In comparison, the earnings of a retiree working part-time for extra money are taxable. This indicates that a retiree in the 25% tax bracket must earn $1,250 in order to increase spending by $1,000.
4. You decide how to spend the reverse mortgage proceeds
There are no limits imposed by the lender on how you spend your reverse mortgage payout. For example, you can use reverse mortgage funds to supplement your monthly income, take a lump sum for any reason (including the purchase of a vacation house or a world trip), or just establish a line of credit for emergencies.
5. Your house is still yours
Taking out a reverse mortgage does not imply that you have given up ownership of your home. Even if you’re experiencing the financial benefits of your home’s equity, you still own it. When reverse mortgage borrowers sell their properties, any excess proceeds over those required to repay the loan are returned to them. When a reverse mortgage borrower dies, any money left over after the loan has been repaid becomes part of their estate.
6. You have the option to avoid foreclosure
A reverse mortgage can assist you in avoiding foreclosure. If you don’t have enough income to keep up with the payments on a standard forward mortgage but have a lot of equity in your house, you can use a reverse mortgage to pay off and discharge your traditional mortgage.
7. You cannot outlive the benefits of a reverse mortgage
Borrowers who opt for tenure payments (monthly income for as long as you live in the house) will outlast reverse mortgage payouts. If the balance of a reverse mortgage loan exceeds the property value, you will continue to receive tenure payments. It makes no difference if the loan exceeds the home’s worth. No one, not even you, your estate, or your heirs, is liable for any shortfall.
