If you are 62 or older and need money to pay off the loan, boost your income, or cover healthcare costs, a reverse mortgage could be an option for you. It enables you to convert a portion of your home's equity into cash without being required to sell it or incur additional monthly payments. However, you must take your time in considering this as a reverse mortgage can be tricky, and it might not be the best option for you. Reverse mortgages can diminish home equity, leaving you and your descendants with fewer assets. If you do decide to look for one, research the various reverse mortgage products and compare lenders before choosing one. With that in mind, here’s what you may need to know about reverse mortgages. What Is A Reverse Mortgage?
A reverse mortgage is, in essence, a loan. A homeowner who is 62 years of age or older and has a sizable amount of equity in their property could borrow against it and receive cash as a lump sum, a set monthly payment, or a line of credit. A reverse mortgage does not require the homeowner to make any loan payments, in contrast to a forward mortgage, the kind used to purchase a home. Instead, the entire loan amount, up to a maximum, will become due and payable when the borrower dies, chooses to leave the property completely, or sells it. Federal regulations require lenders to structure their mortgages so that they don't go over the value of the property. The loan insurance offered by the plan will shield the lender from needing to cover the difference between the borrower and the borrower's estate. How Does It Work? When you have a normal mortgage, you make monthly payments to the lender to gradually purchase your property. You obtain a loan through a reverse mortgage, and the lender pays you back. Reverse mortgages act as a form of advance payment on your home equity by taking a portion of the value of your property and turning it into payments to you. Typically, the money you get is tax-free and as long as you continue to reside in your house, you are not required to repay the loan. Furthermore, you, your spouse, or your estate would pay back the loan when you passed away, sold your house, or moved out. Sometimes that means selling the house to pay off the loan. What Can It Be Used For? According to some experts, popular and permissible uses of the proceeds of a reverse mortgage include boosting retirement income, paying for necessary home repairs, or covering out-of-pocket medical expenditures. Furthermore, a reverse mortgage can prevent seniors from turning to high-interest lines of credit or other more expensive loans "in any case when normal income or accessible savings are insufficient to cover needs." The Alternatives To Reverse Mortgages There are alternatives if you're not convinced about getting a reverse mortgage. In fact, a home equity loan or HELOC is probably a better choice if you are under 62 years old (and presumably won't be turning 62 anytime soon). You can use the equity in your home to finance any of these loans, but lenders will only let you borrow up to 80% to 85% of the property's worth, and you'll have to make payments on a home equity loan on a monthly basis. With a HELOC, payments are necessary once the line of credit's draw period has passed. Home equity loans and HELOCs frequently have closing charges and interest rates that are far cheaper than those offered by reverse mortgages. Aside from a home equity loan, you could also consider cutting expenses, downsizing, and refinancing.
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AuthorJOHN ROBINSON Archives
February 2023
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