If you're over 60, a homeowner, and need money, you may already be considering a reverse mortgage. Whether it's because you're currently undergoing financial difficulties or want more financial flexibility, this option certainly has its pros and cons.
Reverse mortgages have been around for the better part of 50 years and were specifically designed to help provide older homeowners with a way to improve their financial standing.
Before you jump at the opportunity to apply, you should understand exactly what a reverse mortgage is. Let’s take a wise dive into the nitty-gritty.
A reverse mortgage is basically a home equity loan. The loan is only available to seniors that are 62 years or older. Here’s what makes them so attractive: the money loaned out doesn't have to be paid back until the property is sold, vacated or foreclosed on.
You can calculate whether a reverse mortgage is a good option for you. An online Reverse Mortgage calculator makes this easy to do.
There are a number of benefits that you can enjoy by taking out a reverse mortgage, including the following:
You won't have to pay mortgage payments - Whatever you owed on your mortgage will be eliminated. Instead of paying the lender mortgage payments, they will be paying you. This is why it's called a "reverse mortgage." Not having to pay monthly mortgage payments can be a huge financial relief.
You won't have to repay the loan until you move - If you plan on staying in your home for the rest of your life, a reverse mortgage can be an excellent way to lessen your financial burden. It can be used to cover medical debts, or improve your quality of life.
You won't be responsible for paying back the loan until you move or pass away. At this time, the lender would either sell the house to pay for the loan or your heirs pay off the loan.
Your heirs won't be liable - If you pass away, your heirs will not be burdened with the debt of having to repay the reverse mortgage.
However, they will have the option of paying back the balance of the loan that you used in order to obtain ownership of the house if they were to inherit it. If they don't, the house goes to the lender, who will sell it off to cover for the loan.
You won't be taxed - The money provided by the lender in a reverse mortgage is tax-free. This is because the money that's disbursed are considered loan advances and not income.
There are flexible disbursement options - You can choose to have a line of credit or receive monthly payments. With a credit line, you can draw from until you hit the limit. Alternatively, you can choose monthly payments to structure the payout.
Even though it may seem like there couldn't possibly be any disadvantages to a reverse mortgage considering how many benefits there are, there are a few. These features are drawbacks to keep in mind:
Your house could depreciate in value - If the house has depreciated in value since you took out the reverse mortgage and you end up using more than the house is worth. In the event of your leaving the house, if your heirs want to keep it, they will end up having to pay more than the house is worth.
You want to leave your house to your heirs - If you promised your home to your children or your grandchildren, you may want to reconsider taking out a reverse mortgage. Unless they are able to repay the loan once you pass away, the house will become the lender's property to sell.
Your home can still be foreclosed on - Getting a reverse mortgage does not protect you from foreclosure. You will still be responsible for paying the property taxes and homeowner's insurance. The lender may foreclose on your home if you break any of the terms of the reverse mortgage as well.
You plan on moving out - Reverse mortgages can be financially ruinous for anyone that isn't planning on staying in their house for a long period of time due to their high financing charges.
This consumer website may help you find more information about reverse mortgages, the loan process, and if this is right for you.
The #1 Take Away: Know the pros and cons before you apply for a reverse mortgage.
Think carefully about your personal situation and determine if this is the best option for you, your loved ones and your heirs. A reverse mortgage can be beneficial to homeowners who are 62 or older and don't plan on moving out for a long period of time.
Although there are many benefits, it's important that you consider the drawbacks. By carefully evaluating your financial situation before you apply for a reverse mortgage, you’ll have peace of mind that you’re making the best, informed decision.