The pros and the cons of applying for a reverse mortgage.
A reverse mortgage refers to a situation where a homeowner receives regular payments from a bank so that they can relinquish their equity on the property. Typically, this mortgage option is used by retirees. In the United States, you have to be at least 62 years old to have a reverse mortgage on your home. Whether you are getting into retirement or already spending your days away from the workplace, a reverse mortgage is an option you might be considering. Most of the time, this is because you will receive paychecks later on.
However, would a reverse mortgage work for or against you? You’re the one who can answer this question most accurately based on your situation. To help you come to an informed conclusion, we have gathered the pros and cons of reverse mortgages here. Read through them below.
The advantages of reverse mortgages
When you are above the age of 62, you might lack money to live through your retirement. As a retiree, you might experience difficulties paying for some of your medical bills or buying healthier foods. In such situations, a reverse mortgage would be of great assistance. This is because you would be able to get consistent payments from the bank. The money would help you afford these things and have a comfortable retirement.
Another advantage reverse mortgages pose is you will continue residing in your house even after you begin receiving payments from the bank. What’s more, you retain the property’s ownership all through your retirement years as agreed with the bank.
Do you need a large sum of money in a hurry? Then a reverse mortgage would enable you to receive a payment from the bank through a lump sum. In case you prefer smaller payments on a regular basis, banks offering reverse mortgages also offer this option. This could help you make smaller budgets for your home. You can even get a combination of both these options as long as you live in the home.
In case you still have an existing mortgage on your home, the payments you receive from your reverse mortgage could help you pay off the remaining fees. The best part about this advantage is that you do not have to keep up with mortgage payments as long as you continue to live in the house and pay the necessary taxes and fees for its maintenance. This could significantly reduce your stress especially if your job was your only source of income and you did not have enough savings.
The disadvantages of a reverse mortgage
One of the most evident cons of a reverse mortgage is that as you continue to receive payments, the loan balance increases tremendously. This is because the interest on the loan as well as other fees you have to pay accumulate with time.
A reverse mortgage is given based on home equity. That said, you have a narrower scope of the objects you can leave your heirs. You can leave your children the house. However, they will have to pay the loan balance to assume ownership. As such, most beneficiaries opt to forego the property and sell the house to cater for the loan’s expenses.
Another disadvantage reverse mortgages have is the many conditions in which it could become due and have to be repaid immediately. These conditions are referred to as ‘maturity events’. For example, the loan becomes automatically due if you live elsewhere for twelve months or if you fail to pay the necessary taxes. In case you fail to maintain the property as required, you will also have to begin repaying the loan immediately.
You now have enough information on reverse mortgages to guide you through your decision. Contact your bank for more details and remember to choose wisely.
