A reverse mortgage sounds like the perfect solution for some retirees. Turning the price of your home into a steady stream of income that is borrowed against your home's value keeps you living a lifestyle that you love. But it isn't all good. Reverse mortgages can be notoriously expensive and provide burdens on your heirs when you die. You need to carefully weigh benefits and dangers of a reverse mortgage before deciding if it's the way to secure your financial future.
Benefit: Tax Free Income
Because the taxes on your home have already been paid, you don't need to pay taxes on the money that you receive from your reverse mortgage. This can be a relief for many seniors who don't have the money to pay high taxes on their money. It also provides steady money, much like a salary for seniors who are retired or who are living on Social Security benefits.
Danger: Expenses
Reverse mortgages are a huge moneymaker for banks and lending institutions. According to an article in "Time," the fees usually are $10,000 to $15,000 in order to complete a reverse mortgage. Those fees are taken directly from the value of the home. You'll be responsible for high interest rates, closing costs and insurance fees with the beginning of a reverse mortgage. Most of the fees are structured so that they come directly from the value of your home, so you rarely pay upfront.
Benefit: Heirs
If, when you die, your home is sold and sale price is more than the amount that you borrowed against your home with the reverse mortgage, your heirs get to keep the difference as part of their inheritance.
Danger: Heirs
If, when you die, your home is sold and the amount gained is less than what you borrowed against your home with a reverse mortgage, your heirs will be responsible for paying the difference.
Benefit: No Credit Score
Your credit score and past credit history are not taken into consideration with this type of loan. Because a reverse mortgage isn't meant to be paid back until you pass on and you die, the loan manager will take other things into consideration, such as the home's value and your health and age. This can be a comfort for those who have spotty financial histories but still need a steady stream of income to support their lifestyles.
Danger: Loan Counselors
You may be asked to submit to physical testing in order to obtain a reverse mortgage. You'll most likely meet with a counselor to talk about your plans for the future, and visit the doctor. This may be uncomfortable for some seniors. Time magazine also warns against counselors who try and cross-sell to seniors to use their reverse mortgages to buy annuities and stocks and bonds.
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