Reverse mortgages impact your overall net worth as well as have tax and estate planning considerations.
Here are some points to consider with regard to reverse mortgages:
- Up-front costs. The closing costs for a reverse mortgage normally exceed the closing costs for a conventional mortgage. This means that a reverse mortgage may be expensive if you plan to remain in your home for only a couple of years.
- Total amount owed. The amount you owe on a reverse mortgage generally grows over time. Interest is charged
on the outstanding balance and added to the amount you owe each month. That means your total debt increases over time as loan funds are advanced to you and interest accrues on the loan.
- Interest rates. Reverse mortgages may have fixed or variable rates. Most have variable rates that are tied to a financial index and will likely change according to market conditions.
- Equity. Reverse mortgages can use up all or some of the equity in your home, leaving fewer assets for you and your heirs.
- Proceeds. Under certain circumstances, the proceeds from a reverse mortgage could affect the homeowner's eligibility for some public-assistance programs such as Supplemental Security Income (SSI) or Medicaid.
- Property taxes. If you don't pay the property taxes on your home, don't maintain it properly, or fail to pay your homeowner's insurance, you risk the reverse mortgage loan becoming due and payable.
- Housing costs. Unlike trading down to a home with lower housing expenses, a reverse mortgage does not reduce your housing costs. Since you stay in your home, you still face real estate taxes, insurance, repairs, and other costs associated with the home.
- Discretionary payments. You can make discretionary principal and interest payments at any time.