Is reverse mortgage a good idea for you?

Darryl Bachmeier
Sep 8, 2020
Finance


Managing your finances during old age can be a tedious job. This gets even tougher if you don’t have enough retirement savings, or in case there are unforeseen expenditures such as on healthcare. If you’re a senior citizen who is a homeowner and is looking to raise some cash to supplement your income, or to pay off some major financial dues, then perhaps you can look into the option of a reverse mortgage. But what is a reverse mortgage and is it a good idea for you? Let’s figure it out.

What is a reverse mortgage and how does it work?

A reverse mortgage is a special type of loan available to individuals who are 62 years or old, and it allows them to borrow against the value of their home equity. The payments can be received through monthly payments or lump sum, and you do not have to make any periodic loan payments. This works in contrast to a regular home mortgage, in which you make payments to the bank to buy the house. A reverse mortgage takes part of the homeowner’s equity, and the entire sum becomes due whenever the borrower dies, sells his house, or moves to a new location. Over the course of the loan, the homeowner’s debt increases while his equity decreases and the home acts as collateral for the loan and is sold off at maturity to repay the loan principal and all associated costs including interest and fees.

The eligibility criteria

Multiple requirements must be fulfilled before an individual can apply for a reverse mortgage. The obvious one is the age requirement of a person being 62 or older. Other requirements include that you must own the house completely or must pay back any existing mortgage with the receipts of the reverse mortgage. You are also expected to consider that home as your permanent residence, and regularly pay all taxes, insurance cost, and fulfill other legal obligations. It is also a requirement to keep your house in good condition, participate in consumer information sessions, in addition to satisfying other specific requirements.

Pros and cons

Even though a lot can be said about reverse mortgages, especially about the various types, let’s now focus on its pros and cons.

The positives

The first argument for a reverse mortgage is that the proceeds from the loan are considered tax free by the IRS, which means you won’t have to pay any tax in addition to what you might already be paying. Other than this, a reverse mortgage can come in very handy if you don’t have any sustainable source of income after retirement. You can then opt for a loan with monthly payouts and utilize the proceeds for your monthly expenditures. This feature allows you to benefit from your home equity, a source from where most of your net-worth derives from. Finally, as mentioned before, you can utilize a reverse mortgage to pay off any existing mortgage you might have on your home. This frees you from consistent monthly mortgage payments, giving you the option of paying it all off if you move out, sell the house, or in the case you die.

The negatives

A crucial issue regarding reverse mortgage is that you can be evicted from your own home in case you default on certain conditions. We’ve already talked about those conditions before, as they include failure to pay relevant taxes, failure to maintain the house, and also not living in that home for most of the year. This is why it is crucial to fully understand if you’ll be able to keep up with these conditions, as failure to do so can result in you being kicked out of your own house. Additionally, this is not the ideal option for you if you wish for your heirs to inherit your home. The loan is usually settled by selling the house or turning it over to the lenders. In any case, you usually end up losing the majority of the ownership of your house, because of which your heir might not be able to utilize it for themselves. Moreover, a reverse mortgage is an expensive option considering the several fees and premiums involved in the loan. This is why experts recommend not considering this option for short term financing needs as alternatives can prove to be more cost-efficient. Furthermore, this is not the option for individuals who plan on moving out soon from their current residence. Finally, worst-case scenario, you are moved to a nursing home due to your ailing health and spend most of your year over there. Sadly, even this could be considered as a reason for foreclosure by the lender, leading to you losing your home.

Conclusion

In conclusion, think carefully before opting for a reverse mortgage and see beforehand if it will suit your needs. We hope this short article helped in your decision-making process. Good Luck!

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