A reverse mortgage “can be” a way for you to make ends meet in your retirement years. However, it’s worth noting they aren’t advantageous for every person and every life situation. The following is more information about what a reverse mortgage is, its benefits as well as the drawbacks. Learning this will ensure you can make an educated decision on the topic:
What is a Reverse Mortgage?
First things first, a reverse mortgage is a type of loan available to you once you reach the age of 62. With this loan, you borrow against your home’s value or equity. You receive income, either in a lump sum, monthly payments or a line of credit. It differs from a mortgage in that you do not have to make payments on the loan. Simply put, instead of you making a payment to a lender, with a reverse mortgage, the lender makes the payment to you.
Benefits of a Reverse Mortgage
There are many advantages to this type of loan. A few of which are listed below:
- This “loan” provides you with needed resources during your retirement years, using your home as an asset.
- You keep the title to your home and can still reside therein.
- You can use the proceeds of a reversed mortgage to pay off a current mortgage if you find yourself in a difficult financial situation.
- You do not have to make payments on your mortgage as long as you maintain it, pay taxes and insurance and live in your home.
- Most often, a reversed mortgage income is not taxable.
- You nor your heir are personally responsible or liable for any amount in which the mortgage exceeds the value of your home after it is repaid.
Drawbacks of a Reverse Mortgage
After reading the above, you might be thinking this reverse mortgage sounds like a pretty good deal. Where do you sign up? Unfortunately, there are a few drawbacks to consider before jumping into a reverse mortgage feet first, and they are as follows:
- The loan balance that will need to be repaid increases over time due to fees and interest.
- Although you can still leave your home to your heirs upon your death, when a reverse mortgage is involved, they will have to repay that loan amount prior to selling the home.
- In some cases, Supplemental Security Income or Medicaid eligibility can be affected by reverse mortgage income, though not always.
- A reverse mortgage loan is due and must be repaid at the time of “maturity event.” This could be when you as the borrower pass away, you move out of the home for more than 12 months time (for medical purposes) or six months time for non-medical reasons. If you fail to pay homeowners association fees, maintain your property, meet other loan obligations or pay taxes and insurance on the home, the reverse mortgage can also become due.
- Loan fees associated with a reverse mortgage can often be higher than with traditional loans.
How to Know if It’s Right For You
A reverse mortgage can be a solution to a financial problem as it can be the difference between you staying in your home or being forced out. Of course, it can also cause a burden of debt to fall upon your heirs and can end up costing you a significant amount of money with regard to fees and interest. Therefore, it is not an agreement that should be entered into lightly.