Advantages and Disadvantages of Reverse Mortgages

advantages and disadvantages of reverse mortgages

Reverse mortgages are an option for seniors that have owned their home for a number of years and find that they now need to increase their cash flow to continue to enjoy life.  However a reverse mortgage will only be an option if the homeowner has finished paying off their home or has at least paid off most of it.

So how does a reverse mortgage work? A reverse mortgage allows you to borrow some of the equity in your home and use the money to fund your current living expenses. If for example you bought your house in the ‘50s like my parents did and you only paid $30,000, today that property may be worth $250,000 or more. If you successfully paid off your original $30,000 mortgage and you have no other loans on your house, you now have $250,000 in equity.  Understand that you can only borrow a portion of your equity and not the full amount. How much you can actually borrow will depend on your age and your property value. Why not take advantage of that equity to help you out today? Because, like everything, there are advantages and disadvantages when it comes to taking out a reverse mortgage. Let’s talk about them

Advantages of Reverse Mortgages

  • If you qualify for a reverse mortgage the mortgage company pays you, either a lump sum payment, or periodic payments.
  • You can use the money that you receive however you wish.
  • The money you receive along with the accrued interest is paid off when you do finally sell your home.
  • Lenders cannot force you to sell your home to pay back the loan.
  • The older you are the more money you may qualify for.

Disadvantages of Reverse Mortgages

  • The home must be your principal residence.
  • Only certain property types will qualify.
  • Interest rates for reverse mortgages are typically higher than conventional mortgages.
  • You will incur additional upfront fees and charges when the mortgage is processed.
  • Some lenders also charge a monthly service fee.
  • You must own the home outright, or at least a high percentage of the current value and you cannot have any other liens or loans against the house.
  • The age requirement for a reverse mortgage depends on where you live. You might be able to apply at age 55 or you may have to wait until you turn 62.

Seek Financial Advice

Before you even consider a reverse mortgage make sure you weigh all of your options and consider your current living situation as well as your future. Other options may include selling today and downsizing, or using a line of credit. If you are confused, speak with a financial professional before making any decisions.


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