A reverse mortgage is a way to take out cash on your home right now in exchange for loan terms. You pay down the new loan (which has specific payback scheduling that we’ll discuss shortly), and you do what you want with the money.
That all sounds well and good, but there are some things that we want to tell you about reverse mortgages to protect your assets, and prepare you before you jump in with both feet.
At the end of the day, it’s a loan that’s very similar to your initial home loan. There are risks, but if you were able to pay high monthly payments for 15 or 30 years, the terms of a reverse mortgage should be doable as long as you have stable income to pay off the difference each month so it doesn’t sneak up on you.
Every financial product (and make no mistake, this is a financial product for institutions to gain from) will have pros and cons. Let’s talk about that and help you out.
How Does it Work?
A reverse mortgage is a loan on your home that doesn’t have to be paid back like a loan. Let’s explain. A reverse mortgage only needs to be paid back on three occasions:
- You Die: Seniors are the targeted market for reverse mortgages, and the loan is payable by co-signers, otherwise the property goes into custody of the reverse mortgage holder.
- You Move: You don’t want to be here anymore, you want to downsize or move across the country. You need to pay off your reverse mortgage first, or face heavy penalties.
- You Sell the Home: The housing market looks good, so you want to sell and retire somewhere else. You have to pay off the reverse mortgage before you sell the home, otherwise you face penalties.
Pros & Cons
Let’s just get the big ones out of the way and really quantify the pluses and minuses of taking out a reverse mortgage:
- You Can Keep Your Home: Reverse mortgages mean you don’t have to leave your current home, because you can no longer default on a mortgage.
- Supplement Income: Your income lowers when you retire, but with a reverse mortgage, you can lower your monthly expenses and have the cash to pay them off.
- No Taxes: The income on a reverse mortgage has technically already had taxes paid on it, so the IRS doesn’t tax you on your reverse mortgage.
- You Could Still Lose Your House: You’re not immune to losing your home if you read the fine print.
- Fees and Low Equity: If you have no cash, you’ll have to take the monthly maintenance fees and broker fees that you’ll be charged and pay it immediately out of the equity you’re using.
- Fixed-Rate Options Mitigate Your Reverse Mortgage Amount: Fixed-rate financing means you can access less equity, and non fixed-rate financing means you’re subject to a lot of potential financial ruin.
Is a Reverse Mortgage a Good Idea?
Mortgage loans are very similar to reverse mortgages, however, they’re almost always taken out by senior citizens. It’s only a good idea if you know for a fact that an IRA or social security income payments will be able to cover the new cost of your loan and you aren’t planning on moving, or leaving a loved one with debt.
The predatory practice of many reverse mortgages is that it forces those with little liquid cash and plenty of home equity to sign up, and they run a risk of losing that home due to inability to pay, health issues, or other circumstances.
In the end, a company is hedging against your dying before you pay off the loan, and even if you do pay it off, they stand to gain some money.
In order to use a reverse mortgage to your benefit, you need to make sure you can pay it all off with little to no worries in the future. If the loan can be paid off in five years, and you know you can cover it with payments from your IRA withdrawals that can cover it, you stand on solid ground.
Reverse mortgages have more cons than pros, but it all depends on your circumstances, your financial wellbeing, and what you intend to do with the money.
If you don’t plan on leaving your home to anyone anyway, a reverse mortgage could be a way to live gloriously for a few years, and let the home fall to the company once you pass. It’s really all up to you.
Just be sure that a reverse mortgage benefits you right now and it’s the right option. It should never be used out of desperation unless the only other option is homelessness.
Last but not least, they’re always going to try and upsell you on shelling out more of your home equity in the terms, but you control the terms.
It’s your asset, your property, so don’t be afraid to speak up for yourself and be definitive on the percentage of equity that you’re willing to put on the line.
Reverse Mortgage FAQ's
If you die before you pay off the loan, your co-signer has to pay the rest off, or it goes to the financial institution. So you won’t have a home to leave to anyone.
The FHA gets involved to help with everything during setup, but after that they’re gone. You’re not likely to take out the entire value of your home in a reverse mortgage, but even so, it’s still something you should only use if need be.
Treat it like a home loan and pay it back in installments, and you won’t really endure any negative aspects of it. Just don’t expect to pay back a 15-year lump sum of money in monthly installments if you’re pushing 90.
There’s risk and reward, but at the end of the day, the company will make their money, so you’re free to do what you want with yours.
Technically, this is the only class of citizen who should even consider a reverse mortgage. You can use a reverse mortgage as a way to bring in income that doesn’t affect your eligibility for Medicare or Medicaid, and use it to fund your retirement years.
You can do with the money what you wish, you should just utilize it for an investment or a way to benefit in the long-term instead of short-term expenses.
This can take the place of an IRA if it was started late and funds are running out, or if you weren’t able to invest in your retirement during your working years.
If you don’t like the idea of signing on for a reverse mortgage but you still need money, you’re not alone. There are alternatives, such as:
- Apply for a home equity loan, which works differently than a reverse mortgage.
- Refinance your current mortgage to reduce monthly payments and increase your monthly allowance.
- Sell your home and downsize, reducing your mortgage (or paying off a new home entirely and making up the difference to eliminate mortgage payments from your bills altogether).
- Consider renting out a portion of your home, if you’re worried about safety, spend a small amount of money to separate a section of your home to rent out.
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