A reverse mortgage is a type of home loan that lets you convert a portion of your home equity into cash while still maintaining the ownership. In regular mortgages, a home buyer makes payments to the lender to pay off the debt. Whilst in reverse mortgage, the lender makes payments to the borrower in return for the equity and hence the debt increases over time. These payments can be in a lump sum or a monthly payment. The loan is not settled until the borrower sells his home, move out or pass on.
Although, it might seem very convincing but the truth is reverse mortgages are quite controversial. People have really contradicting views about reverse mortgage. Some people consider it a really good solution for retirees who need extra money, as it allows them to tap into their most valuable asset while still keeping the ownership.
Another group of people believe that the reverse mortgage comes with unnecessary high fees and the loan balance only increases over time. In addition, reverse mortgages that are not made through an FHA program lack protection for the consumers which means it can leave you or your heir on the hook in case the home loses value.
Before making any decisions, go through these detailed pros and cons of reverse mortgage to make an informed decision
The pros of Reverse Mortgage
- You will be able to access up to 55% of your home equity without having to pay monthly mortgage payments.
- You will not have to pay taxes on the payment you receive from your lender. Moreover, as IRS considers a reverse mortgage a loan, and not actual income, it will not be used in formulas that impacts your medical insurance and social security.
- There will be no monthly mortgage payments. On top of that, you are still holding the home ownership.
- You can choose to receive a cash lump sum or a series of monthly payments or a combination of both. This allows you to spend your cash wherever you want to.
- You can’t be forced into early payments. The only way you are obliged to repay your reverse mortgage is if you no longer use the property as your primary residence, sell out the property, or die.
- You will have regular income after retirement. A reverse mortgage is very suitable for people who do not have a monthly source of income after their retirement. They can use the reverse mortgage option to meet their living expenses.
- It is a non-recourse loan. If you opt. for a FHA program, even if your home sells at a price than you owe to your lender, you do not have to worry about it as long as the home sells for 95% of its appraised value.
The cons of Reverse Mortgage
- The fees and interest are generally higher as compared to a traditional mortgage or HELOC. However, the interest rate is not as high as an unsecured line of credit, a second mortgage, personal loan or credit card.
- You will eventually have to pay back the amount that you borrowed along with the interest rate. Although there are no monthly mortgage payments, the borrowed amount keeps on increasing only.
- There will be an early repayment charge if you decide to pay back your reverse mortgage in the first five years.
- It comes with a lot of costs which include Mortgage Insurance, Servicing fee, Origination fee, and closing costs.
- You must be at least 62 years old to get qualified for a reverse mortgage.
- Your heirs might not be able to keep the home. If you want to pass on your home to your children, it is possible that they might not be able to pay off all the borrowed money with an interest rate.
- You might still lose your home to foreclosure. You are responsible for the property taxes, maintenance, and homeowner insurance. In case you do not make these payments, you will most likely lose your home ownership to foreclosure.
Should You Get a Reverse Mortgage?
At its very core, a reverse mortgage will get you some flow of cash during a difficult time after retirement. Therefore, if you are in dire need of some extra money, this can be a good option for you. To make things even simpler, the money made out of reverse mortgage is tax-free.
However, if you review the application and processing of a reverse mortgage, you will notice that the associated fees are quite high. If you feel like this fee is out of your budget, you should refrain from considering a reverse mortgage. There are other ways as well that can help you get some extra cash after retirement so don’t get too hooked onto reverse mortgage.
Also, if you choose a reverse mortgage now, and later to decide to repay, you might have a difficulty with finances as well.
A reverse mortgage will definitely give your financial situation a boost that it needs, but it will also create problems for when you will leave your home. If you want your children to keep the house, without putting unnecessary burden on them, a reverse mortgage could be more trouble than it’s worth. Before jumping to any impulsive decision, consult a financial advisor or a real estate expert to discuss your mortgage situation and which option is better for you.
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