When You Should (and Shouldn’t) Get a Reverse Mortgage
There’s comfort in owning a home, especially when you’ve lived there for many years. Reverse mortgages are a special kind of home equity loan designed to help you stay in your home in your senior years while providing you with cash for living expenses.
How reverse mortgages work
You must be at least 62 years old to qualify. As with a traditional home equity loan, your ability to borrow hinges on the equity value you’ve built up in the property. The more equity you have, the lower the interest rate on what you borrow. You can choose to receive the loan as a lump sum, a fixed monthly payout or a line of credit that lets you draw out money as needed. Unlike a traditional home equity loan, a reverse mortgage comes without a credit check. This is balanced with additional upfront fees, as well as interest.
You don’t have to repay the loan for as long as you live in your home. You repay when you move out. If you die while still living in the home, your heirs must repay the loan. In either case, the loan is usually repaid simply by selling the home. According to the Consumer Financial Protection Bureau, neither you nor your heirs will have to repay more than the home is worth.
The main advantage is the extra money it puts in your pocket. This can be used to pay off debt or live more comfortably. Reverse mortgages work for a wide range of needs. They offer wiggle room for those living on fixed incomes, covering unexpected medical bills or traveling. If you hope to stay in your home for several more years, a reverse mortgage can help you make it happen.
Property taxes and insurance remain your responsibility; you can lose your home if you fail to pay these costs, as the lender can foreclose. If you start taking out money too early, you may run out of equity unless your home’s value increases substantially. The loan principal and interest continue to grow until you pay off what you’ve borrowed or sell the home. Finally, a reverse mortgage may make it impossible to pass the home to your heirs, if neither you nor they have the resources to pay off the loan without selling the property.
A reverse mortgage isn’t a good fit for everyone.
- Most reverse mortgage lenders prefer that you own your home outright. If you don’t, you may be required to use some of the money from a reverse mortgage to pay off other home loans.
- Money from a reverse mortgage can potentially bump you into a higher tax bracket or disqualify you for certain government programs. Research your financial status carefully.
- If you find budgets annoying and tend to spend money freely as long as it’s available, a reverse mortgage probably isn’t for you.
When you’re planning to stay in your home for a while, a reverse mortgage loosens the restraints of fixed income and debt that many seniors face.
Knoblock MJ (2015 March 2) When You Should (and Shouldn’t) Get a Reverse Mortgage. Retrieved on March 20, 2015 from NerdWallet.com