A reverse mortgage is similar to taking a ‘Home Equity Loan.’ A home equity line gives you access to a lump-sum of money. You know the terms of the loan. After some time, you must pay it back with interest. Another option is the HELOC ‘Home Equity Line of Credit.’ Like its name, it works like using a credit card. From time to time, you can borrow the equity in your home. Similar to the HELOC, you must pay back the money with interest.
A reverse mortgage is different. It becomes due as soon as you move out of the house, pass away or sell the property.
Many people consider taking a reverse mortgage to finance their retirement years. Financially speaking, a reverse mortgage might not be your best option. Talk to a financial expert or a real estate attorney. Evaluate all of your options before deciding.
The Structure is Different from the Forward Mortgages
In a traditional mortgage, you pay the installment and your equity in the home increases. It is the opposite case for a reverse mortgage. Your lender pays you the installment, and with every payment, your investment decreases.
The positive side is that you’re still the owner of the house. The title remains in your name and you don’t pay back this loan unless you move out or sell the property.
You have Loan Expenses to Pay
A reverse mortgage is a loan. Like any other loan, you must pay the associated fees. Do consider these costs before signing the document. Your lender will give you a brief detail regarding the charges.
The Mortgage Interest Rates are High
In a forwarded mortgage, the security factor is your credit score and the down payment. Your monthly income determines whether you qualify for a certain amount of mortgage or not.
After retirement, your income, credit score or down payment don’t help you with loan approval. Your home is the collateral. Since the landlord does not check the credit score or income, he is assuming a higher risk that comes with a higher interest rate. So whenever, you pay back this amount; you’ll pay a significantly high-interest rate.
Your Home Might Not be a Part of Your Estate
You won’t be able to pass your home to your heirs after taking a reverse mortgage. Your family cannot assume the ownership of the property.
The terms of the reverse mortgage define this step. The loan becomes due after you pass away or move out. In that case, the lender will sell the property, and the leftover sum will be paid to your family. Your family can purchase the home from the bank by paying the loan amount with interest rate and related expenses.
You Must Pay the Loan if You Move
The reverse mortgage becomes due if you are away from your home for more than 12 months. If you are planning to move out, then a reverse mortgage is not the best option.
In the case, you have to move to an assisted living facility, ensure that you come back within the 12-months period.
There are Other Costs to Pay
Homeownership comes with certain costs. After taking the loan, you’re still responsible for insurance, taxes, and other maintenance costs. If you are months late with insurance or tax payments, the lender will have to sell the property, and you must move out.
Taking a reverse mortgage doesn’t provide a real benefit if you want to keep the house. A reverse mortgage is a good option if you’re going to live in a place without paying the rent and you want to utilize the money to pay for retirement years. However, there are other lucrative options available. For instance, downsizing might provide the funds and the shelter. The equity in your home, if invested somewhere else, might be a reliable source of income.
In some cases, it might be better to sell your home for cash, invest your funds and live a debt-free life. Please contact a financial attorney to evaluate your options. You can also contact us for a free consultation.