Reverse mortgages are a potentially powerful tool that you should take it upon yourself to understand completely. They are a great way for homeowners ages 62 and up to withdraw a portion of the equity that exists in their house. There are both advantages and disadvantages to taking out a reverse mortgage, and you should consider these pros and cons before going through with the decision. Here is everything you need to know about reverse mortgages.
What is a reverse mortgage?
As previously stated, a reverse mortgage allows homeowners 62 and up to borrow a portion of their home’s equity. This loan becomes an income which is tax-free, since with a reverse mortgage you are being paid by the lender just as you paid off your regular mortgage to the lender. There are several ways to find out how much you might be able to get from a reverse mortgage of your home, including mobile reverse mortgage calculators such as https://reverse.mortgage/calculator.
How It Works
If you choose a reverse mortgage, you won’t have to make a monthly payment and will be able to continue to live in your home. The loan will have to be repaid, however, most often when the borrower moves out, sells their home, or dies. The amount you can borrow will vary based on the age of the borrowers and the home’s value. Reverse mortgages favor homeowners who are older and own more expensive properties. Choosing a reverse mortgage with a variable interest rate will give you a certain amount of money disbursed each month, whereas if you choose a reverse mortgage with a fixed interest rate, you’ll get a lump-sum payment.
Types of Reverse Mortgages
There are three main types of reverse mortgages, all which work slightly differently. Home Equity Conversion Mortgages (HECMs) are the most popular type, since they are federally insured and don’t have any limits on what the funds can be used for. They do, however, have a higher upfront cost than the other two types. A proprietary reverse mortgage, on the other hand, is a private loan that is not federally supported. You may be able to get a larger loan advance, but these types of reverse mortgages are more difficult to get approved and more risky than HECMs.
Single-purpose reverse mortgages are the rarest type of reverse mortgage. They are typically offered by nonprofit organizations or specific state and local government agencies. They are usually for a smaller amount and can only be used for a specific purpose. If you need a lump sum for a specific purpose such as a handicap accessible home remodel, for instance, it is worth finding out if there’s a way to get this type of reverse mortgage, since they are more forgiving than the other two types.
Pros and Cons of Reverse Mortgages
As with most financial affairs, there are pros and cons to getting a reverse mortgage. Borrowing against your home equity can be a huge weight off your back if you are retiring house rich but cash poor. On the other hand, there are fees involved that can add up, in addition to the costs associated with keeping up your home. Here are some of the pros and cons of reverse mortgages.
There are several advantages to getting a reverse mortgage. Borrowers can often use the funds for living expenses, healthcare, debt, or other bills, and those same funds can help you enjoy your retirement in comfort. If you’re facing foreclosure, you can also use a reverse mortgage to pay off your existing mortgage, allowing you to keep and continue living in your home. In addition, there are ways to ensure that your spouse will be able to remain in your home even if they do not appear on the mortgage.
On the other hand, there are several cons as well. You must pay homeowners insurance, property taxes, and any type of upkeep your home might need. Fees and other costs in the process of getting a reverse mortgage can be high, lowering the amount you can borrow in those first months especially. As ever, you must consider carefully whether a reverse mortgage is the best option for you.