A reverse mortgage has been a popular choice for lots of people, during the recession. It has saved homeowners from having to sell their house during financial hardship. Some of the stories in the media and from friends might lead you to believe that there are only upsides to a reversed mortgage. Lenders don’t usually tell you all of the pitfalls because they can make a lot of profit on it. You should be aware that a reversed mortgage is not the best solution for everyone.
What is a reverse mortgage?A reverse mortgage is a way to take the equity out of your home and turn it into cash. Equity is the difference between the market value of the house and the remaining mortgage amount. Basically, it’s the money you have left after selling your house and paying off the mortgage lender.
The reverse mortgage can give you access to this equity without selling your house. It’s aimed at people that are 62 years of age or older and has no limitations to what the money is spend on. It’s called a reverse mortgage because you don’t have to make monthly payments to your mortgage lender but he will actually be paying you.
There are three ways in which you can receive the money. It can be released either as a one-off payment, a line of credit that can be accessed when you need it, or by monthly installments. Most reverse mortgages allow you to take out about 60% to 80% of the value of your house.
Benefits of a reverse mortgageThe biggest benefit of a reverse mortgage is that you will have fast access to a large sum of money. You don’t even need to have a steady income to be able to apply. It’s not until you sell your house that you have to worry about paying back.
A lot of people who find themselves in a financial crisis have no other option than to sell their house and start all over. The big benefit of a reverse mortgage is that this nightmare scenario can be avoided.
Downsides of a reverse mortgageThe reverse mortgage won’t exempt you from paying property taxes, homeowners insurance or homeowners association dues. You’ll also have to finance the interest and closing costs. All of these costs have to be factored in when making the decision whether or not to go for a reverse mortgage.
It’s also good to note that you won’t be building up any equity in your home anymore. Instead of making payments that get you closer to owning the house every month, you’re building up a debt.
Should I get a reverse mortgage?This is a question that depends largely on your specific personal situation. Getting a reverse mortgage is definitely not a step you’ll want to take without thorough calculation. You’ll have to ask yourself first if there are absolutely no other options available than to tap into the equity of your home. This equity is considered by many as a means to fund retirement or to leave to loved ones and might not be something you want to give up.
You can change your financial situation in a drastic way just by changing your lifestyle drastically. Until you’ve turned every penny around and are living as minimalistic as possible, you should start to look at drastic options like a reverse mortgage.
There are also federal assistance programs available that aren’t profit-based. We highly recommend you to talk to an independent financial professional that can take all of your personal details into account.
Photo Credits: House Sign – Reverse Mortgage/ Photo by American Advisors Group via AAG.com / CC BY