The Pros And Cons Of Reverse Mortgages
The number of homeowners that are taking advantage of reverse mortgages continues to climb
, and that number will only increase in the next several years as Baby Boomers retire and realize that:
a) they have not stashed away enough for retirement, and/or
b) what they did stash away has performed abysmally on the market.
Before you choose to cash in on your homes equity after age 62 in an attempt to find
solutions to your cash flow problems, here is a list of the
pros and cons of reverse mortgages:
The Pros
-Income from reverse mortgages does not affect Social Security or Medicare benefits in the vast majority of cases
-These loan advances are not taxable, in general
-Most of these loan advances do not have income requirements
-You retain the title to your home
-You can choose to receive the money through a fixed monthly payment, a lump sum, a line of credit or a combination of these options
-Even if you outlive the loan, you will not owe more than its value
-Repayment of the loan is not due until the last surviving borrower dies, sells the home or no longer lives in it as a primary residence (you can live in a nursing home or other medical facility for up to one year before the loan is due, as well)
-If the home is sold and the loan and
fees are paid, leftover equity belongs to you and your heirs
The Cons
-Money gained from a reverse mortgage might affect your eligibility for Medicaid
-
Fees and closing costs are huge, usually in the $10,000-$15,000 range
-You might incur servicing
fees during the term of the mortgage as well
-Any exhaustion of home equity means fewer assets for heirs. This is a particular danger for young retirees who might live well past the time when the loan is gobbled up.
- Borrowers must keep up with taxes, homeowner insurance, maintenance costs and other expenses. If not, the loan becomes due.
-The interest on the loan is not tax deductible, and debt increases over time as interest is charged on the outstanding balance of the loan. The interest rate is variable with most loans, tied to short-term indexes such as one-year Treasury bills, etc.
Anyone considering a reverse mortgage should reflect on the
pros and cons above. As with many types of loans, a reverse mortgage is a form of short-term gain that could result in long-term pain if adequate measures to re-pay the loan are not taken. The long-term pain could also affect your heirs if a debt remains after your death.
by: Charles Ramos
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