A senior considering a reverse mortgage loan should consider all the potential risks and rewards in equal measure before deciding whether or not to get such a loan. This is according to a new column by personal finance columnist Joe Cortez at NextAdvisor, as published by Time.
“Fear of COVID infection at nursing home facilities has many senior Americans, and their families, evaluating other options, Cortez writes. “As of February 2021, more than a third of the country’s COVID-related deaths occur within long term care facilities. Many are turning to reverse mortgages to help pay for in-home care as an alternative. This helps explain why 2020 data from industry tracker, Reverse Market Insight reflects a 34.8% year over year increase in reverse mortgages.”
For someone who is considering a reverse mortgage loan either to avoid moving into a long-term care or other senior housing facility, or for those who are looking to bolster their retirement finances, there are a series of pros and cons that a prospective borrower should be aware of, according to Cortez.
Among the pros, the first primary one is access to additional cash, he says.
“For some, the payments of a reverse mortgage allow them to defer collecting Social Security and get larger monthly payments, while others use the money to augment their fixed-income budget for long-term healthcare needs,” Cortez writes.
One financial planner concurs with the assertion, telling Cortez that taking out a reverse mortgage can provide that access to cash which can be used for an abundance of different needs.
Other potential “pros” for a borrower include the ability for the borrower to remain in their home; the idea that a reverse mortgage’s loan proceeds are not taxable; the loan’s nonrecourse feature minimizes the likelihood of the debt exceeding the property value; and the borrower continues to own their home contrary to popular belief.
Among the cons that a potential borrower should consider, the first and foremost is the cost, according to Cortez.
“Depending on the home and type of reverse mortgage, closing costs alone can exceed $20,000, he says. “Moreover, homeowners will also be responsible for paying many of the fees that were once part of their monthly mortgage payment. Out of the monthly reverse mortgage payments, homeowners must budget for quarterly property taxes, home insurance, and any dues to the homeowner’s association.”
Additional potential cons include that the home can still be foreclosed upon if a borrower misses property tax and/or insurance payments or cannot maintain the home; interest rates could “cut into” the home’s equity even further; the guidelines around Home Equity Conversion Mortgages (HECMs) are very strict; and a status change may cause the terms of the loan to be changed, he says.
Read the article at Time, via NextAdvisor.