What are the pros and cons of a reverse mortgage?

Home Equity Conversion Mortgages (HECMs) are reverse mortgages that help homeowners who are 62 and up* use equity in their homes—without mandatory monthly mortgage payments**. Some of the pros for a reverse mortgage include easy and flexible access to home equity, and zero or deferred mortgage payments; however, there are drawbacks like reduced inheritance potential and continued home upkeep costs.

While reverse mortgages may still bear a stigma from some highly publicized elder-abuse cases prior to the 2008 financial crisis, with strengthened federal oversight, using a reverse mortgage today comes with a lot less risks and more protections. Keep reading to see if it may be an option for your lifestyle.

If you’re at least 62 years old*, own and occupy your primary residence, can keep up with property taxes and insurance and have equity in your home, you could benefit from the financial breathing room that reverse mortgages provide. Should you be eligible, you wouldn’t have to purchase other financial products to qualify; the 2008 Housing and Economic Recovery Act explicitly states borrowers aren’t obligated to buy additional products from a lender, a former predatory practice from bad faith actors.

Eliminated monthly mortgage payments**

Say goodbye to monthly mortgage payments. You won’t have to pay back the mortgage until you sell, decide to no longer use the home as your primary residence or pass away.

Scammers may push reverse mortgages as financial relief without mentioning closing costs or the fact that homeowners still need to continue paying property taxes and insurance. With the creation of the Consumer Financial Protection Bureau in 2010, these disclosures must be made clear in their marketing.

Flexible disbursement options

With a reverse mortgage, your home’s equity is converted into tax-free supplemental income. You can choose to disburse payments every month or as a lump sum. There are no restrictions; feel free to use that money for anything you choose from supplementing your social security income to checking off your retirement bucket list.

Prior to the Reverse Mortgage Stabilization Act of 2013, there was concern that debt-ridden borrowers would immediately spend the full amount of available credit on unnecessary expenses or fraudulent investments, ultimately resulting in foreclosure. Regulations now require thorough financial assessments of debts. Plus, you may be limited by how much cash you can withdraw in the first year.

Never pay more than your home’s worth

As a non-recourse loan protected by the Federal Housing Administration (FHA), your equity is protected—meaning you’ll never pay more than the home’s worth at the time of repayment.

One of the most persistent myths about reverse mortgages is that you’re relinquishing equity. This is untrue as your equity is still protected up to the loan’s balance.

Stay in your home

No need to worry about downsizing or relocating, as well as the high costs associated with them. As mentioned earlier, you don’t have to pay back your reverse mortgage as long as you stay in your home. However, if you want to move, there’s a little-known reverse mortgage for purchase option too.

While reverse mortgages are useful, they don’t completely absolve the rest of your homeownership costs. Reverse mortgages also provide you with supplemental income that may affect income-related government benefits like Medicaid (but not Medicare).

Your loan balance grows

Unlike other mortgage loans where you’re paying off your balance, reverse mortgages accumulate the balance. As mentioned, repayment is due if you move, use another home as your primary residence, or pass away. This may pose a challenge if you want to leave the home for your children or other recipients.

Ongoing property expenses continue

As a homeowner, you’re still required to continue paying property taxes, homeowner’s insurance, HOA fees, and any other insurance premiums you currently pay for region-specific climate disasters. If you’re unable to continue these payments, you could risk foreclosure.

Income-based government benefits may be affected

If you receive income-based benefits like Medicaid or Supplemental Security Income, it’s important to speak with an HUD-approved counselor to anticipate any changes. Unspent reverse mortgage funds can be counted against the asset limit for these government programs. Ultimately you may have more income than before, potentially disqualifying you from a program intended for those without other income options.

Counseling is required

As part of the 2008 Housing and Economic Recovery Act, reverse mortgage borrowers are required to complete counseling to make sure terms are fully understood. This was set in place to protect borrowers and inform them of all potential risks and technicalities. Some homeowners may not want to take on the extra effort of attending mandatory counseling as part of the qualification process.

Guild offers Flex Payment Home Equity Conversion Mortgages which are reverse mortgages insured by FHA, for both purchase and refinance. While not FHA-insured, Jumbo reverse mortgage loans are also available. If you qualify, you may be eligible for this powerful tool to make the most of your finances.

• Flex Payment Home Equity Conversion Mortgage for refinancing: You can refinance your existing loan into a Flex Payment reverse mortgage to eliminate monthly mortgage payments**, get a better interest rate or access your home’s cash for any purpose.
• Flex Payment Home Equity Conversion Mortgage for purchasing: With this option, you’ll be able to use the sale of your current home or other savings to put a down payment on a new home. The Flex Payment reverse mortgage then covers the remaining balance.
• Flex Payment Jumbo mortgage: While not a Home Equity Conversion Mortgage insured by the FHA, Guild also offers up to $4 million in lending for higher-value homes.

Reverse mortgages can help you make the most of your retirement by providing you with funds from one of your largest investments—your home. To figure out how you and your family could benefit, reach out to one of our branches today in your area.