As they near retirement and the end of their working lives, many seniors find that they are in a position where they don’t have enough money to live from day to day. They may have credit card debt or loans that need to be paid off, living them financially strapped. One way seniors can increase their cash flow is through equity on their homes. Reverse mortgages, also known as a home equity conversion mortgage, are one way for seniors to access cash. There are pros and cons for choosing this method of financing.
What are the pros of reverse mortgages?
- In the US these mortgages are backed by the US Dept. of Housing and Urban Development (HUD). This means your heirs will not be responsible for repayment of the mortgage.
- The money received from a reverse mortgage is tax free and does not need to be repaid unless the homeowner(s) passes away or leaves the residence permanently.
The cons of a reverse mortgage:
- If you are looking after an elderly parent, you may need home care. If you use the proceeds from a reverse mortgage to pay for home care, you may make your loved one ineligible for services through Medicaid.
- If you are considering a reverse mortgage, stay in your home for as long as possible. Closing costs may be factored into your loan.
With a reverse mortgage, the homeowner’s name is still on the title. The bank does not take ownership of the home. Before moving forward with a reverse mortgage, speak with someone about the laws in your state as they may differ from other states.
When you apply for a reverse mortgage, it is necessary to attend an HUD counseling session. This is to make sure you understand how a reverse mortgage works and it also gives you the opportunity to ask any questions you may have.
For more information on understanding reverse mortgages, click here.
For some options on who is offering reverse mortgages in the U.S. click here.
For our Canadian viewers, learn about Reverse Mortgage Myths by clicking here.