Should You Consider a Reverse Mortgage?

In the past most people have considered a reverse mortgage only when refinancing, but many of our clients are now using one to purchase a new home. If they have assets, but not a lot of income, this can be a good way to buy more of a home than they would qualify for with a traditional mortgage, and reduce monthly outlay at the same time. Below are some advantages and disadvantages of a reverse mortgage.

Advantages of a reverse mortgage:

• No fixed due date
• Repayment not required as long as the home remains the borrower's principal residence 
• Nonrecourse loans -- the amount can never exceed the selling price
• Borrower holds title to property
• Loan proceeds not taxable
• Flexible payment options

Disadvantages of a Reverse Mortgage

• Loan-to-value ratios generally yield only 65% to 80% of the home's present value
• Upon death, the loan's interest and costs are due and payable, usually requiring the sale of the home. Heirs may have to pay back the loan if they wish to retain the home.
• Foreclosure is still possible, if the borrower fails to remain in the home for 12 months, or fails to pay taxes or maintain the home.
• Terms and conditions of reverse mortgages may be difficult to understand and borrowers may also be targets for aggressive sales pitches or other expensive or inappropriate services or products.

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