Reverse mortgages are a widely publicized financial option, but many people do not know much about them. Reading this article will help you better understand reverse mortgages, explain the advantages and disadvantages and help you decide whether a reverse mortgage is right for you.
How Does A Reverse Mortgage Work?
Reverse mortgages are a unique type of mortgage available to senior citizens ages 62 and above. With a reverse mortgage, you are given a loan based on the equity of your home. For example, if you have completely paid off your house and it is worth $500,000, you can get a reverse mortgage for the same amount. Instead of making payments to a lender, as with a traditional mortgage, you are receiving payments. This is one of the main differences between a traditional and reverse mortgage.
There are a number of other requirements. The house must be your primary residence. You must pay property taxes and have homeowner’s insurance on the house. In addition, you must keep the house maintained.
If something happens to you, the loan is left to your heir(s). Fortunately, your heir(s) will never owe more than the value of your house, even if the amount you borrowed exceeds the value of your house. If the amount owed is less than the value of your house, the additional equity goes to your heirs instead of the lenders.
There are two options of payment for a reverse mortgage. You can either choose monthly payments or one large lump sum if you need to cover unforeseen expenses or would just like to have the money if necessary. The frequency and size of payments for reverse home loans are very flexible; they can be set up in pretty much any way you would like.
Are There Disadvantages of a Reverse Mortgage?
Be aware that the equity of your home decreases every time you receive a payment. Using the example above, if you have received $50,000 from a reverse mortgage, you have $450,000 of equity left in your house.
Also, keep in mind that although you are borrowing based on equity, the reverse mortgage is still a loan. The amount you must pay back grows with each payment from the reverse mortgage. Interest and lender fees are also factored in when you repay the loan.
However, reverse mortgages are designed to help, not hurt, you. The loan does not need to be paid back until the house is sold and you can pay back all or part of the loan early usually with no penalty. As stated above, you can never owe more than your house is worth. This protects you in the event of a housing slump.
What Do I Do Now?
The Web is a great place to find reverse mortgage information. You can find out more about specific requirements and the application process at reverse mortgage lenders’ websites. Many of these lenders provide a reverse mortgage calculator to help you get a good idea of the kind of loan you would receive. Research reverse mortgages to decide if one would be a good fit for you and your family.
If you are over 62 years of age and you own your home outright or have a very small regular mortgage left on your home, a reverse mortgage may be a great financial option for you.