Description: Know the positives and negatives of reverse mortgage loans prior to applying for one.

What are the pros and cons of reverse mortgage loans?

If you’re a senior and looking for a steady source of cash flow, then a reverse mortgage might be a good option for you. These loans allow you to convert your home equity into a stable cash flow. Reverse mortgages are expensive loans and there are a lot of arguments regarding the utility of these loans. There are a number of pros and cons of reverse mortgage loans. This article would focus on some of the pros and cons of this loan.

What is a reverse mortgage?

A reverse mortgage is a loan which allows senior homeowners (aged 62 or over) to switch their home equity into cash. In this way, they can access their home equity without having to sell their home. Instead of making payments to the lender, the borrower receives payments from the lender. It is contrary to a common mortgage loan. The reverse mortgage loan is paid back with interest if the borrower sells his home, shifts to another place or expires.

These loans are quite valuable options for particular types of borrowers, but they are not a good option for everyone. Prior to going for such a loan, you must thoroughly evaluate the costs, terms and substitutes. Given below are the pros and cons of these loans:

Pros of reverse mortgages

These loans offer an assured source of tax-free earnings for the remainder of your life    
You can’t owe higher than your home value at the time of paying off the loan, regardless of your balance
You have the option to get your money as a monthly payment, a lump sum payment, a line of credit or a blend of these three modes.
You don’t need to be the complete owner of your home to be eligible for a loan
These loans permit you to stay in your home  
You can pay off the loan without the necessity of selling your home
Title and ownership of the home are held in your name
Income from these loans wouldn’t affect your Social Security and Medicare qualifications
If the balance of the loan is lower than the home value at the time of repayment, your inheritors can retain the difference
Your savings, credit score and income are not applied to work out the loan. Alternatively, your health, age, home equity and home value are taken into account.
You don’t have to bother about making a monthly payment with this type of a loan as you would have paid for borrowing a home equity line of credit (HELOC).
You can refuse the loan for any purpose (right of rescission) during the 3 day period once the loan closes.

Cons of reverse mortgages

These loans are quite costly options. Expensive interest rates, fees, closing costs and mortgage insurance might be applicable.
Lowers the amount of home equity you bequeath to your children or grandchildren
Only available to the senior borrowers (aged 62 or more)
Any balance outstanding on your first mortgage would be rolled into the balance of this loan
You still have the responsibility for paying insurance, property taxes and maintenance costs for your home. If you’re unable to make timely payments for these costs, you might have pay to off the loan sooner.
The loan needs to be paid off when you sell your home, expire or move to any other location
Might affect your ability to be eligible for Supplemental Social Security and Medicaid benefits
Your inheritors would need to pay off the balance along with interest when the loan term is over
This loan is costlier and more obligatory than a home equity line of credit
There are limits or caps on how much you can borrow with most of these types of loans
You need to talk to a reverse mortgage counselor prior to taking out the loan.
Once the 3 day period is over, the loan is finalized. Refinancing this type of a loan is hard and expensive.

Hence, you should understand the pros and cons of this loan before borrowing one.