Pros and Cons of Reverse Mortgages
By Keira Rowland On 11 June 2013 In Blog
Granted to borrowers who are at least 62 years old, reverse mortgages are made available by private corporations in Canada, and offer 25 to 50% of a property’s value, at most. This sort of loan can be distributed in many ways, such as a lump sum at the settlement, in cash, or as an annuity (involving a monthly payment in cash). These mortgages come due when the borrower sells the house, moves out, or dies. While the phrase “reverse mortgage” usually conjures up thoughts of prolonged and troublesome expenses, the loan does have its fair share of advantages too.
Pros:
- The method of receiving the money can be chosen by the borrower – e.g. as a lump sum, as a fixed monthly payment, a line of credit, or a combination of these methods.
- The homeowner keeps the title to the home.
- There is no requirement for minimum income in order to establish eligibility.
- If the money a borrower receives in payments exceeds the value of the house, s/he will still not owe more than what the home is worth.
- Social Security or Medicare benefits are not affected by the income obtained from reverse mortgage.
- There is no tax on loan advances
- For around 12 months before the loan becomes due, borrowers are permitted to live in medical facilities or nursing homes.
- No payments are due until the borrower dies, moves out of the house, or sells the house.
- If the loan and fees are paid to the lender after the home has been sold, the remaining equity belongs to the borrower and his/her heirs.
Cons:
- Young aspiring home owners cannot take advantage of this loan, as only those who are at least 62 years of age are eligible for reverse mortgages.
- Medicaid eligibility could be affected by the proceeds from reverse mortgage.
- The list of assets available to bequeath to heirs grows thin as home equity is used up.
- Interest is charged to the loan’s outstanding balance, so the debt only grows with time.
- There are variable interest rates attached to short term indexes as far as most loans are concerned, such as the LIBOR or the one-year Treasury Bill.
- The loan may become due if borrowers fail, at any point, to pay homeowners’ insurance, taxes, maintenance costs, and a variety of other expenses.
- Until the time when the loan is paid off, interest is not a deductible tax.
- Lenders charge additional costs which are fairly steep, such as origination fees and a variety of other closing costs.
- During the mortgage term, lenders can also charge the borrowers servicing fees.
- Free debt counseling is required by lenders before the loan application process begins.