Reverse Mortgages

Reverse Mortgages Explained

If you are preparing for retirement, a reverse mortgage can be a good way to help you maintain an income.

A reverse mortgage is a loan for homeowners who are 62 or over and have considerable home equity. They can borrow against the value of the home and receive funds as a lump sum, a fixed monthly payment or a line of credit.

Unlike other types of mortgages, reverse mortgages are not paid back through loan payments. Rather, the entire balance becomes due when the borrower dies, moves away permanently or sells the home.

The loans are structured so the amount of the loan does not exceed the home’s value. The borrower’s estate will also not be held responsible for repaying the loan if the home’s value drops and, therefore, is not worth enough to compensate for the loan.

Reverse mortgages are a great way to give seniors access to the equity in their home, however, they are complex, and they are not the best choice for everyone. Scams involving reverse mortgages are common so seniors should use caution before signing any paperwork.

How Does a Reverse Mortgage Work?

Instead of the homeowner making payments to the lender, the lender makes payments to the homeowner.

The home serves as collateral for the loan. Therefore, the proceeds from the home’s sale goes to repay the reverse mortgage’s principal, interest, mortgage insurance and fees. Any proceeds beyond that go to the homeowner or the homeowner’s estate.

Reverse Mortgage Pros and Cons

One of the biggest advantages of a reverse mortgage it that it gives seniors access to the equity in their home without having to sell or moveout. The money they get can cover their basic living expenses through retirement. As long as they are able to keep up with property tax, maintenance and insurance, they can remain living in their houses as they get older.

The downsides of taking out a reverse mortgage are:

1)      A substantial amount of your home’s equity will be paid to interest and loan fees.

2)      You won’t have as much of an inheritance to pass on to your heirs.

3)      If you have a housemate, they won’t have the right to continue living with your after you pass away.

Finally, reverse mortgages may not be worth it if you outlive the proceeds. If you pick a payment plan that doesn’t provide a lifetime income, in time, you may not have any money left. It is for this reason that you may be better off opting for a lump sum or term plan rather than a line of credit that can be used up.

If you are a senior, a reverse mortgage can be a great way to maintain an income in your twilight years. Just know the benefits and drawbacks before proceeding.