Learn the Pros & Cons of Reverse Mortgages and Alternatives
Cons of Reverse Mortgage
1. Required occupancy
Your reverse mortgage lender needs you live in your house, and the lender will verify your residency on a regular basis, which might be difficult despite your best efforts. If you wind up in a care facility for more than 12 months unexpectedly, you will not have met the criterion. Even if your health is fine, but you wish to fulfill a longstanding ambition of traveling for two years, Your reverse mortgage may be an impediment all over the world.
2. Maintenance, insurance, and taxes are all required
Reverse mortgages require homeowners to maintain the collateral in order to safeguard the lender by making the property livable and marketable. You must pay property taxes and hazard insurance, as well as keep the house in excellent condition. Your mortgage lender may foreclose if the property value lowers as a result of inadequate upkeep or inability to pay taxes and insurance charges.
3. Reverse mortgages can be costly
A reverse mortgage is not the most affordable mortgage product. In fact, if you qualify, a standard home equity loan will most likely cost far less. The reverse mortgage’s upfront price and annual insurance premium of 1.25 percent might be prohibitively expensive, especially for borrowers who choose the maximum available lump sum payout. The upfront premium is much higher than it appears because it is based on the property value (or $625,500, whichever is smaller) rather than the loan amount. For example, a 72-year-old borrower with a $200,000 property can borrow up to $118,200, but the $5,000 upfront insurance premium is based on the $200,000 home value. You might avoid the hefty 2.5 percent premium and minimize your insurance costs by selecting a different payout for a 0.5 percent upfront charge, or $1,000.
4. You can lose your federal perks
Before choosing the manner and amount of payout, you should analyze the consequences of each reverse mortgage payout option. If you make a mistake, you could lose key government benefits on which you have been relying. If you do not quickly spend a lump payment, for example, you may lose eligibility for low-income borrowers’ needs-based programs. A single person, for example, must have $2,000 in cash on hand to be eligible for Medicaid or Supplemental Security Income. A substantial enough reverse mortgage payout could unintentionally disqualify you.
5. Heirs may be dissatisfied
Heirs may be concerned if you mortgage “the family home.” If you value your heirs’ opinions, discussing your reverse mortgage arrangements with family members, estate planners, or attorneys may be critical to maintaining pleasant, healthy family relationships.
Reverse Mortgage Alternatives
Reverse mortgages are not the only source of ready cash for homeowners 62 and older, and they are far from the cheapest. Before proceeding with a reverse mortgage, you may want to investigate the other choices listed below.
1. Traditional Cash-Out Refinance
New standards for traditional may allow the inclusion of retirement funds in a borrower’s qualifying income — known as “asset depletion” or “asset dissipation” — for loan approval purposes. The lender divides 70% of your eligible retirement savings by the number of months in the loan period. If you have $500,000, you would add $1,944 to your monthly income to qualify for a 15-year loan or $972 to qualify for a 30-year loan.
Furthermore, underwriting for a standard cash-out refinances permits “grossing up” Social Security payments and other non-taxable income by 25%. For example, if your monthly Social Security payout is $1,000, you will be given credit for receiving $1,250 for loan approval purposes. You have a high chance of getting accepted if you keep the loan-to-value ratio low and have a solid credit rating. If you discover that your outstanding bills are impeding loan approval, you have the option of “paying off debt to qualify,” which entails allocating some or all of your loan proceeds to outstanding debts at closing.
