The pros, cons & alternatives to reverse mortgages

Are you considering a reverse mortgage? Before you sign, think about the pros and cons of such a decision, and if there are alternatives that will work better for your family.

Pros

• You can tap into your most valuable asset to improve your lifestyle.
• You can continue living in your home for many years.
• You never owe more than your house is worth.
• You do not pay taxes on the proceeds and the interest is deductible on any income generated by the proceeds.
• Homeowners without children or who don't want to leave an inheritance can enjoy their money while alive.

Cons

• Trading down to a smaller property is much simpler and less expensive.
• Equity release is complex, and you don't know how much you will end up owing.
• You may have no equity left if you need to move to a long-term care facility.
• Much — or all — of your family's inheritance can be depleted.

• Is a reverse mortgage right for me?
• Have I considered alternative ways of raising cash?
• Am I claiming all the government benefits and private pension income owed to me?
• Are there penalties if I repay the loan early?
• How much will I pay in arrangement fees?
• Do I want to leave the full or partial value of my home to my loved ones?
• Have I spoken to everybody who will be affected by my decision?

• Downsize means you can move to a smaller property, invest and live off the difference.
• Your house may now be too big if you're still in the family home but your children have moved away. However, moving is stressful and upsetting so think carefully before you decide to leave your home.
• You won't pay any capital gains tax when you sell your own home. But once you re-invest the money, you're liable to pay income tax on the interest.

• You could raise an ordinary mortgage against your property, taking a relatively small proportion of its value, say $50,000, on what is known as an "interest-only" basis.
• You repay the interest every month, but not the capital (which can be repaid from your estate when you die).
• The advantage over a reverse mortgage is that the debt doesn't grow in value, the disadvantage is that you need enough spare funds to repay the monthly interest.

Your beneficiaries could help you out financially, knowing they will eventually profit from a share in the property. Make sure all your beneficiaries accept the arrangement and you aren't creating a family dispute. Get your lawyer to draw up a proper agreement.

You can do whatever you want with the money from a reverse mortgage. Here are some suggestions.

• Make new investments to generate income.
• Do home improvements.
• Pay off other debts at a higher interest rate and improve cashflow.
• Hire in-home help or medical care.
• Invest in hobbies or a new business.
• Purchase a new car or vacation property.
• Give cash gifts now to children or heirs.
• Help with your family's college or university tuition.

Reverse mortgages offer many benefits, but there are often alternatives better designed to help your particular situation. The best thing you can do is to ask yourself some important questions and look at other options before deciding on the option that's right for you.