Pros and cons of taking out a reverse mortgage

Reverse mortgages can be useful tools to stay in your home but consulting an expert can help you make an informed decision.

A Home Equity Conversion Mortgage (HECM), more commonly known as a reverse mortgage, were designed to provide income to seniors over the age of 62 by using the equity in their homes without having a monthly payment. Since many seniors experience a reduction in income as they retire, eliminating a mortgage payment and potentially setting up an additional source of income can be an attractive option.

Reverse mortgages have been in existence for over 50 years but have been regulated by the FHA only since 1987 under the Housing and Community Development Act of 1987. Part of the reason that reverse mortgages sometimes get a bad rap is from those 20 years of being largely unregulated. In addition, lack of education about how they work has contributed to negative feedback about senior citizens potentially losing their homes because they weren’t properly educated on the costs and obligations.

One of the most positive outcomes of the Dodd-Frank Act of 2010 was to require meeting with a HUD certified Housing Counselor prior to obtaining a HECM loan. This can help ensure that the client has the tools needed to make an informed decision regarding obtaining a reverse mortgage. Of course, there are both pros and cons of obtaining a reverse mortgage.

Pros:

  1. There will no longer be a monthly mortgage payment required.
  2. By eliminating the mortgage payment, monthly cash flow can increase.
  3. Lower monthly payments can enable senior citizens to stay in their homes and age in place more affordably.
  4. Depending on the amount of equity in the home, a reverse mortgage may allow for an income or lump sum payment to help make ends meet or do necessary home repairs.

Cons:

  1. Property taxes and homeowners insurance will continue to be the responsibility of the homeowner. It’s easy to forget these obligations as they are not monthly bills but neglecting to pay these debts will result in penalties and the possibility of losing your home.
  2. There are costs involved with obtaining a reverse mortgage. How much depends on which lender you choose, your age when you obtain the reverse mortgage and interest rates at the time.
  3. It is possible to outlive the equity in your home. If you obtain a reverse mortgage at the minimum age of 62, the income received from the property can run out, leaving the homeowner without necessary financial resources.

The Consumer Financial Protection Bureau recently issued a warning regarding reverse mortgages. Homeowners aged 62 and older have been taking out and using the income from HECM mortgages, and then delaying receiving their Social Security benefits. While this is one strategy to manage retirement income and assets, it can be risky. This particular type of mortgage is not for everyone and should be utilized after discussion with a financial advisor and certified HECM Housing counselor.

Michigan State University Extension offers financial literacy and homeownership workshops throughout the year to help you become financially healthy.  For more information of classes in your area, go to either http://msue.anr.msu.edu/events or www.mimoneyhealth.org.  Additionally, you can take the Financial Health Survey at MI Money Health to access if you’re financially healthy and discover more ways you can improve your financial health.  

Michigan State University Extension has released a new toolkit for homeowners who are experiencing or have previously experienced foreclosure. This toolkit will equip these individuals and families with tools to help them recover their financial stability, in the case that a recovery of their home is not possible. The toolkit is available to download free at MIMoneyHealth.org.

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