A reverse mortgage allows seniors to take advantage of the equity they've accumulated in their home in the form of a loan. If you take out a reverse mortgage, you receive monthly payments and maintain ownership of your home. This type of loan can provide a needed source of cash if you re struggling with a low income, but it s not without its drawbacks.
What Is a Reverse Mortgage?
A reverse mortgage is a loan available for seniors age 62 and older. It allows homeowners to borrow against the equity in their home. Instead of making a monthly mortgage payment, you receive money from your lender. This type of mortgage is only available to people who own their home already or who have a very small mortgage payment. You can only borrow against the amount you have already paid off on your home.
How Do Reverse Mortgages Work?
As with most loans, you will typically pay an origination fee and closing costs. You may also have servicing fees and mortgage insurance premiums to pay through the life of the loan. Most reverse mortgages give you a monthly payment against the equity on your home. However, some lenders will give you a lump sum at the time of origination. It's important to compare mortgage lenders carefully.
Interest is added to your loan with each payment you receive, so a reverse mortgage isn t free money. The more you take out, the more you ultimately owe. Most reverse mortgages have a variable interest rate that changes with the market. Make sure you understand how and when your interest rate changes. Interest on a reverse mortgage is not tax deductible.
Reverse Mortgage Pros and Cons
Your home is perhaps your most valuable asset, giving you access to a larger sum of money than anything else you may own. While borrowing against it can give you a regular source of income, it s important to understand the disadvantages of a reverse mortgage.
Borrowing against your home reduces the assets available for yourself, your spouse and your heirs. If your spouse isn t included in the loan paperwork, payments may stop in the event of your death, leaving only a large loan that requires repayment. In many cases, spouses or heirs must sell the home to settle the loan.
Reverse Mortgage Requirements
Requirements vary by lender but typically include a financial assessment to determine your willingness and ability to meet the mortgage requirements. The lender may include a provision that sets aside a portion of your monthly payment for homeowner s insurance, property taxes and other expenses that you must pay to stay in possession of your home. Some lenders require counseling prior to approving the loan to ensure you understand all the implications of taking on this type of loan.
A reverse mortgage will not eliminate all your home expenses. You must still pay property taxes, utilities, homeowner s insurance and maintenance costs. However, the money you receive with this type of loan can make it easier to keep up with these expenses if you re in a difficult financial situation.