A reverse mortgage is a type of loan that allows homeowners to borrow against the equity in their home. The loan must not be repaid until the homeowner dies, sells the home, or moves out. While a reverse mortgage can be a useful financial tool for some homeowners, it’s important to know the potential drawbacks before signing on the dotted line.
What is a reverse mortgage?
A reverse mortgage is a loan that allows homeowners 62 years or older to convert part of the equity in their homes into cash. The amount that can be borrowed depends on the age of the youngest borrower, the value of the home, and the interest rate.
There are several downsides to reverse mortgages:
- They are expensive. There are origination fees, appraisal fees, and closing costs. In addition, borrowers must pay for insurance and pay a servicing fee.
- Reverse mortgages have high-interest rates.
- If the value of your home declines, you could end up owing more than your home is worth.
- If you move or sell your home, you must repay the loan in full.
- If you die before the loan is repaid, your heirs will be responsible for repaying it.
The different types of reverse mortgages
There are four types of reverse mortgages: single-purpose, proprietary, home equity conversion mortgage (HECM), and shared equity.
Single-purpose reverse mortgages are the most common type offered by state and local governments and non-profit organizations. They’re typically used for a specific purpose, like repairing your home or paying for healthcare expenses.
Proprietary reverse mortgages are private loans backed by the companies that offer them. These loans tend to have higher interest rates and fees than other reverse mortgages, but they can be used for any purpose.
Home equity conversion mortgages (HECMs) are federally insured and backed by the U.S. Department of Housing and Urban Development (HUD). HECMs are the most popular type of reverse mortgage and can be used for any purpose.
Shared equity reverse mortgages are a new type of loan that allows you to share the equity in your home with a lender while still living in it. The lender gets a percentage of the appreciation in your home’s value, but you don’t make any monthly payments and retain ownership of your home.
How a reverse mortgage works
A reverse mortgage is a loan that allows homeowners to access a portion of their home equity without having to make monthly mortgage payments. The loan is repaid when the borrower dies, sells the home, or permanently moves out.
Many people view a reverse mortgage as a way to stay in their home and maintain independence while getting some extra financial security in retirement. However, there are some downsides to taking out a reverse mortgage.
One downside is that you may owe more than your home is worth if you take out a reverse mortgage and then experience a decrease in your home’s value. This could leave your heirs with little or no equity in the home.
Another downside is that you may have to pay for expensive repairs or improvements on the home to qualify for the loan. And finally, if you default on the loan or otherwise violate the terms of the loan, you could face foreclosure.
So, while a reverse mortgage can be a helpful tool for some people in retirement, it’s important to understand the potential risks and downsides before taking out this type of loan.
The benefits of a reverse mortgage
A reverse mortgage can be a great way to supplement your retirement income, but there are some potential downsides.
The primary benefit of a reverse mortgage is that it allows you to access a portion of your home equity without having to sell your home or take on new monthly payments. This can be a great supplement to your retirement income, especially if you have significant equity in your home.
Overall, a reverse mortgage can be a great way to supplement your retirement income. However, it’s important to understand the potential downsides before taking out this loan.
Who should get a reverse mortgage?
Here are a few key things to consider when determining if a reverse mortgage is right for you:
- You must be at least 62 years old.
- You must own your home outright or have a low mortgage balance that can be paid off with the proceeds from the reverse mortgage.
- You must have enough equity in your home to qualify for the loan.
If you meet all of these criteria and think a reverse mortgage could benefit you, there are a few things to keep in mind. First, while reverse mortgages can provide much-needed cash flow in retirement, they also come with fees and interest charges that can add up over time. Second, taking out a reverse mortgage will reduce the equity you have in your home, which could make it more difficult to sell or refinance down the road.
Before taking out a reverse mortgage, it’s important to understand the potential risks and rewards to decide whether this type of loan is right for you. Before taking out a reverse mortgage, talk to your financial advisor to see if it is the right decision.