Reverse mortgages are now a popular option for many senior homeowners. Lower income due to retirement, increased medical costs, and unexpected expenses can all make utilizing the equity stored in your home and attractive option. While tapping into these saving can provide many homeowners with the extra amount they were missing, for others it may be a costly decision. Whether or not a reverse mortgage is the right option for you will depend on your personal circumstances and goals.
What is a reverse mortgage?
A reverse mortgage is similar to a regular mortgage in that it allows homeowners to utilize the equity in their home. Reverse mortgages differ in that instead of requiring the homeowner to immediately begin servicing the loan, payment does not begin as long as the homeowner lives in the home. The loan is satisfied later on when either the home is sold, the home is no longer the homeowner’s primary residence, or upon death.
To qualify for a reverse mortgage, the youngest homeowner must be at least 62 years of age and have considerable equity in their home. Generally, there are no minimum credit score requirements or income requirements.
Potential Benefits of a Reverse Mortgage
Under the right circumstances, a reverse mortgage can offer a number of benefits to homeowners. One of the primary benefits is that the homeowner can stay in his or her home. It also allows homeowners to maintain title on the deed. Additionally, they can live mortgage payment free, as long they meet eligibility requirements for home maintenance, and pay property taxes and insurance. Furthermore, the loan proceeds are not taxable, and the interest rate may be lower than traditional mortgages and home equity loans.
Depending on the needs of the individual seeking a reverse mortgage, payments from the lender can be made as a credit line for emergencies, on a monthly basis, or as a lump sum distribution.
The money can then be used to cover home maintenance, personal medical costs, or any other financial obligation. This additional income could help eliminate major financial concerns for seniors.
Possible Downsides of a Reverse Mortgage
It is easy to be swept away by the promise of additional income during tight financial times, however the decision to take out a reverse mortgage should be made cautiously. Reverse mortgages are typically recommended for individuals who plan to borrow a large sum against their home, and continue living there for an extended period of time. This is because lenders generally charge an origination fee, a mortgage insurance premium, and other closing costs for a reverse mortgage, that may not make financial sense for smaller amounts. Lenders also may charge servicing fees during the term of the mortgage.
Recipients of Medicaid and other need-based government assistance should also be cautious. The government assistance they receive may be affected if too much funds are withdrawn in one month and not spent. However typically, Social Security and Medicare benefits are not affected by a reverse mortgage.
Homeowners who plan to leave an inheritance for their loved ones should also be aware of the effects a reverse mortgage will have on their home. Most reverse mortgages include a nonrecourse clause that prevents the estate from owning more than the value of the home when the loan is due. This means that the loan liability does not pass on to heirs. Heirs can still inherit the home and equity left after the reverse mortgage has been payed off, however it they wanted to retain ownership of the home, they would be required to repay the loan in full, regardless of the value of the home.
When considering a reverse mortgage loan, beware of scams. Due to the complex nature of reverse mortgage loans, it is easy to be taken advantage of. Be diligent in your research and do not respond to unsolicited offers. Consider speaking to a trusted financial specialist who can help you find a reputable lender.
Reverse mortgages can offer an appealing solution for dealing with extra expenses incurred in the later years of life. At the same time, it requires a thorough understanding of personal financial plans and circumstances to make a best fit decision. As with all significant financial transactions, it is beneficial to discuss your options with an independent financial consultant to ensure that you fully understand the options that are available to you. Through careful research and consideration, you can find the solution that helps you or your loved one enjoy the golden years of life.
The content of this blog is intended for informational purposes only. It is not intended to provide legal advice. You should not take, or refrain from taking, any legal action based upon the information contained on this blog without first seeking professional counsel.