A Reverse Mortgage Loan may provide the financial freedom that lets you live the retirement you desire, pay off medical bills, make home improvements, or just free up some extra cash. Weighing the benefits and risks is important before any major decision, so we have highlighted the potential pros and cons of a HECM loan.
According to HUD, many homeowners ages 62 and older with sufficient equity in their homes may be eligible for a Home Equity Conversion Mortgage. Seniors often choose a HECM loan because of the many benefits that fit with their lifestyle. The funds can be received in a lump sum payment, monthly payments, as a line of credit or a combination of these options and homeowners will stay in the comfort of their own home all without making monthly mortgage payments*.
The proceeds are tax-free; however it is always best to consult your tax or financial professional. In addition, provided the home is sold to repay the loan, your heirs will not be personally liable if the loan balance exceeds the value of the home. Any remaining equity will go to your heirs.
Of course, there are potential drawbacks to consider as well. The balance of the HECM loan will increase over time and the value of the estate inheritance may decrease as funds are spent. Fees, including the loan origination fee, may be higher than with traditional forward mortgages. HECM fees also include the Initial FHA Mortgage Insurance Premium, as well as an annual MIP of 1.25%. (Please see chart below for details regarding the initial MIP.) Needs-based government programs such as Medicare may be affected by HECM loan proceeds. Therefore, you are encouraged to consult your trusted financial advisor and appropriate government agencies for any effect on taxes or government benefits.
Pros of Reverse Mortgage
- You can receive the funds in a lump-sum payment, monthly payments, as a line of credit or in a combination of these options
- You can stay in the home without making monthly mortgage payments
- Proceeds are tax-free
- Your heirs are not personally liable if payoff balance exceeds home value
- Your heirs inherit any remaining equity after paying off the reverse mortgage
Cons of a Reverse Mortgage
- HECM loan balance increases over time
- Value of estate inheritance may decrease over time as proceeds are spent
- Fees can be higher than a traditional mortgage
- Initial FHA Mortgage Insurance Premium
- Annual FHA Mortgage Insurance Premium
- Loan origination fee may be higher than traditional mortgages
- Although Social Security and Medicare eligibility are not affected by a reverse mortgage loan, needs-based government programs such as Medicaid can be affected.
*The borrower must live in the home as their primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements.