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Finance and Legal

Reverse Mortgage Pros & Cons

Reviewed by: MySeniorCare Staff
Last Updated: 4/13/2010 3:56:35 PM

A reverse mortgage is an effective way for seniors (62 years or older) to liquefy an asset for important expenses, such as medical bills, food or utilities.

There are many different pros and cons to obtaining a reverse mortgage, and it is not a decision to make on a whim. Seniors should meet with an attorney, financial adviser or real estate expert to better understand their options.

Proceeds Are Tax-Free

One of the major benefits of a reverse mortgage is that the proceeds are entirely tax-free. This means that you will not have to pay taxes on the money you gain from a reverse mortgage, which can alleviate significant financial stress. It also makes this type of loan more attractive than a regular personal loan from a bank or credit union.

The downside to this benefit, however, is that obtaining a reverse mortgage can disqualify you from certain public benefits, such as Medicare or Medicaid. This is because your assets are considered in your application for these benefits, and obtaining a large sum of cash might mean you exceed the maximum assets to qualify.

You Keep Your Home

Unlike traditional second mortgages and collateral loans, a reverse mortgage allows the borrower to keep his or her home as long as he or she is alive. This provides enormous comfort to seniors who are worried about medical bills and other expenses, and who are unsure about their financial futures. Of all the benefits of a reverse mortgage, this is perhaps the most attractive.

Unfortunately, however, this type of loan does come with a drawback: You will not be able to leave your home to your children or other heirs upon your death. When the home is sold, the proceeds from the sale are applied to the loan.

This means that seniors who are hoping to provide for their families will have to seek other options.

Peace of Mind

Living in an unstable economy and on a fixed income, many seniors are terrified about how they will pay their bills and cover their medical care.

A reverse mortgage can provide significant peace of mind with a lump sum loan that is secured by the U.S. Department of Housing and Urban Development (HUD). This is especially true for seniors who have no heirs and who plan to live in their homes the rest of their lives.

The main drawbacks of a reverse mortgage are the numerous costs inherent in obtaining it and the risk of losing all assets that might otherwise go to your family. This is why seniors should obtain counseling before they decide to take out a reverse mortgage so they understand all the options before them.

There are other alternatives to a reverse mortgage that might suit your financial situation better, but you won't know until you explore them.

Your house is likely your largest asset, and perhaps your only means of supporting yourself, and you'll want to know all your options ahead of time.

apalm01
Posted: 9/8/2011 12:21:51 PM

Hi,

Under the "you keep your home" section, the statement is incorrect about leaving the home to the heirs. The borrower does leave the home to the heirs or their estate, and when the heirs sell the home, the remaining equity (if there is any) will go to them. Thank you, Anissa Palmatier 309-807-5545

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