The real estate industry is full of buzzwords, and we’re here to help you stay up to date on all the latest— no matter where you are in your homeownership journey. One of the terms you should know? Reverse mortgages, which allow homeowners aged 62 and older to convert part of their home equity into cash without having to sell or make monthly mortgage payments. Sounds promising, right?

The truth is that reverse mortgages can be predatory — but not to fear, we’re breaking down all the benefits and drawbacks for you today.

The Upside:

The appeal of reverse mortgages lies in their ability to provide financial flexibility and support to older homeowners. Here are some key aspects that make reverse mortgages particularly attractive:

1. Supplemental Income: Homeowners receive payments instead of making them, providing additional income without affecting their monthly budget. In addition, borrowers can choose lump sums, monthly payments, or lines of credit tailored to their financial needs.

2. Use of Home Equity: Reverse mortgages allow homeowners to tap into their home equity without having to sell, offering liquidity from a traditionally illiquid asset.

3. No Repayment Until Certain Conditions: In this type of arrangement, the loan does not need to be repaid until the homeowner sells the home, moves out permanently, or passes away, providing financial relief and stability at the same time.

4. Tax-Free Funds: Funds received from a reverse mortgage are typically tax-free since they are considered loan proceeds, not income.

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The Drawbacks:

1. Mounting Interest and Fees: In a reverse mortgage, interest and fees accumulate over time, which can significantly increase the loan balance.

2. Reduced Home Equity: As the loan balance increases, the home equity decreases, potentially reducing the amount left to heirs. What does that mean, exactly? Heirs may receive little to no inheritance from the sale of the home, especially if the loan balance exceeds the home’s value.

3. Loan Due Upon Change In Residency: If the designated homeowner moves out permanently, the loan becomes due. In fact, even the act of moving to a long-term care facility for more than 12 consecutive months typically triggers the loan repayment.

4. Complexity And Misunderstanding: Reverse mortgages are undeniably complex, with terms and conditions that may be difficult to understand. Despite the nuance involved, misunderstandings about the nature of the loan can lead to financial problems down the line.

5. Potential For Foreclosure: If homeowners fail to meet their obligations (e.g., paying taxes, insurance, or maintaining the home), the lender can foreclose on the property.

6. Affect On Benefits: While reverse mortgage funds do not affect Social Security or Medicare, they can impact eligibility for need-based programs like Medicaid or Supplemental Security Income (SSI).

7. Spousal Implications: If a spouse is not listed as a co-borrower, they may have to move out when the borrowing spouse dies or permanently moves out.

8. Limited Loan Amount: The amount that can be borrowed is limited and may not be sufficient for all financial needs. In other words: Borrowers typically cannot access the full equity of their home, only a percentage of it.

9. Potential Scams And Fraud: Seniors, particularly those in financial distress or with limited financial literacy, are often targeted for reverse mortgages. Because of that, aggressive sales tactics can pressure homeowners into taking out a reverse mortgage without fully understanding the implications. A few worst-case scenarios? Lenders initially presenting reverse mortgages as a risk-free solution to financial problems only to reveal the high costs and obligations later, or misleading borrowers about the nature of the product or the benefits they will receive.

Read more about real estate scams and how to avoid them in this blog right here.

Viable Alternatives:

There are several alternatives that can help homeowners access their home equity or manage their finances without incurring the high costs and risks associated with reverse mortgages, including home equity loans, refinancing, selling, and home-sharing programs.

At the end of the day, reverse mortgages aren’t for everyone — and you can always count on us to tell it like it is.

Get in touch with us today to tap into a wealth of expertise and compassion rooted in your best interests above all! Give us a call today at 202.280.2060 or email us at jsmira@jennsmira.com.