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Reverse Mortgage 101: Pros and Cons

A Senior Couple Sitting on a Park Bench Next to Rose BushesSenior citizens who have low mortgage balances or have their homes outright can leverage on reverse mortgage and reap positive benefits. With today’s stricter rules, older homeowners are rest assured that they are protected, so as their investments.

Now let’s learn more about reverse mortgage. The concept of reverse mortgage has long been introduced in the first line of successful investment planning. Since there is no limitation on how reverse mortgage proceeds are to be used, retirees with limited resources can use their converted equity for basic monthly expenses or healthcare maintenance. Although it is simple, there are a lot of things that you need to consider when considering reverse mortgage.

There are several types of reverse mortgage. The conventional reverse mortgage is only available for homeowners at age 62 and above, who occupy their homes as principal residence. During the loan, individuals will have to make monthly payments. As the principal loan decreases, the equity of the house rises.

Conventional mortgage require homeowners to get hazard insurance and pay the property tax. Some lenders may review senior-couple-happy-house-200the lender’s credit report to determine the alacrity to pay. The most important thing is that ­homeowners are willing to pay their monthly amortization.

Another type of mortgage is the federally insured reverse mortgage. It seems like a government loan but is more appropriately called as Home Equity Conversion Mortgage, wherein the loan is insured by the Federal Housing Administration. In this type of reverse mortgage, homeowners shall have to comply with certain requirements of the FHA and pay monthly insurance.

Now, if your house is valued higher than $750,000 or more, you might want to consider proprietary reverse mortgage. It is basically offered by private companies and is not affected by federal regulations.

Right now, several seniors are leveraging reverse mortgage to get some funds. However, it is also worth noting that market conditions may change. Before embarking on such investments, it pays to consider some of its pros and cons.

What are the advantages of reverse mortgage?

  • There is no fixed date regarding when your loan may be due
  • Homeowners need not repay provided that they remain as principal residence of the borrower
  • The title of the property has to be in the possession of the borrower
  • The proceeds of the reverse mortgage is not subject to tax
  • Reverse mortgage features several payment schemes for homeowners to choose from

downloadWhat are the cons of reverse mortgage?

  • The ratios of loan to value only yields around 65 percent to 80 percent of the home’s current value
  • There is a huge chance that the property or house may be sold in auction if the homeowners die without paying mortgage. Nevertheless, heirs can answer for the obligation in case they want to recover the property or house.
  • If the borrower fails to remain in the home for 12 months, property may be endangered for foreclosure.
  • The terms and conditions of a reverse mortgage is difficult to understand. Homeowners may want to ask the assistance of an expert to interpret vague provisions in the contract so they can fully grasp its meaning.

If you’re considering a reverse mortgage, you may be required to undergo counseling to help you understand what you are entering into before singing for the loan. Now that you know its pros and cons, I hope you’d be more guided in entering into reverse mortgage.