Reverse mortgages for seniors are FHA insured (by the Federal Housing Administration) loans that are collateralized by the equity in a property. Only senior citizens age 62 and older can be considered for these types of loans. Reverse mortgages are not traditional loans because you do not pay the mortgage company every month instead, they pay you. Yes, you read it correctly, the mortgage company purchases the equity in your home by paying you monthly. In some cases, the mortgage company will make a lump sum payment to the owner.
The following is a list of pros concerning securing a reverse mortgage:
1. Homeowner can stay in house
Reverse mortgages for seniors are very helpful financial tools for those people that are struggling to make ends meet in their later years. It allows seniors to stay in their home by retaining home ownership while they are alive.
2. Property can be passed to heirs
The mortgage is FHA insured and this reduces the cost to the heirs when they settle the remaining mortgage debt with the lender. The heirs will only have to settle this debt after the death of the homeowner.
3. FHA insured
4. Loan is non-recourse
In addition, the loan is non-recourse which means it will never exceed the value of the property.
5. Flexible payment options
Another reason this loan benefits seniors is it allows them to receive their payments for their equity on flexible terms. They can get paid via a credit line, lump sum or monthly payments. They can use the money in any manner of their choice including paying off their current mortgage on the property.
6. Low mortgage rates
The other pros of this type of loan is mortgage rates are lower than some traditional mortgages which puts more money in the seniors’ pockets.
Reverse mortgages can be great for seniors, but they have a downside as well. Any senior considering this type of loan should seek a reverse mortgage counselor to learn more about the following cons:
1. High closing costs
The cons of this type of loan is that closing costs are high due to the mortgage insurance and origination fees. The seniors do not pay closing costs out of pocket, but it is built into the loan.
2. Reduced inheritance to heirs
This impacts the heirs by reducing their inheritance because they will have to pay the lender more money to settle if they choose to keep the house. Also, it can make it difficult to sell the house based on the market value and total amount owed.
3. Ineligible for Medicaid and SSI benefits
The unseen downside to this type of loan is that money paid to the senior puts their property in the category of a liquid asset and this may impact their eligibility for Medicaid and SSI.
4. Rapid ballooning interest
The interest rate of the loan is compiled, and this over time causes a ballooning effect that raises that amount owed on the loan.