Reverse mortgages are a special type of loan based on the equity of the home. Instead of getting money from a lender and making regular payments, the lender provides cash based on the home’s equity and records a lien against the property. The money does not need to be repaid as long as you live in the home, and the money is repaid to the lender when the home is sold. Though this might sound like a great idea, it does need to be carefully considered before you make a decision as there are some benefits and disadvantages you’ll want to be aware of.
How Does a Reverse Mortgage Work?
With a reverse mortgage, the equity you have in the home can be used to provide you with cash payments. Instead of paying a lender each month, you’ll receive money. As long as you live in the home, you do not need to make any payments on this loan. When you do move our or if you die, the loan becomes due. The money to repay the loan is taken out of the sale price of the home, whether that’s by you when the house is sold or by your estate after you pass.
Understand the Different Types Available
Every reverse mortgage isn’t the sale. There are three main types that you may come across when you’re considering a reverse mortgage. They include Single-Purpose, HECM, and Proprietary. Single-purpose is a type of reverse mortgage that’s designed to fund one thing, whether that’s to cover property taxes for the home or to pay for repairs the home may need.
A HECM is a reverse mortgage where there are no restrictions on how the money can be used. There are also several different payment options to consider, so you have more control over how you receive and spend the funds. A Proprietary reverse mortgage is one where the homeowner can get a large amount of cash at one time, but there are restrictions. These are only available through private lenders and only for homes with a high appraisal value.
Pros of Getting a Reverse Mortgage
Reverse mortgages make it easy for you to tap into the equity of your home and convert it to cash. They also provide a number of other benefits that are worth understanding if you’re thinking about a reverse mortgage.
- Have Money to Maintain Current Lifestyle – With a reverse mortgage, you’ll have the extra cash needed to maintain your current lifestyle. You won’t need to skimp on the things you enjoy just to make sure you don’t run out of money.
- Travel and Pursue Dreams – Already set for retirement? With the extra money from a reverse mortgage, you could be able to travel more and pursue some of your dreams. What’s on your bucket list? Cross it off with the extra money you’ll have.
- Pay Off Debt – A reverse mortgage provides the funds necessary to pay off debt, giving you the possibility of living without having to worry about old debts in collections, paying off loans, or paying off your mortgage. You might be able to pay off your home and your vehicle, eliminating two of your biggest payments each month.
- Have a Loan with a Controllable Limit – With a reverse mortgage, the loan is limited to the amount of equity you own in the home. The interest won’t get to be higher than the equity in the home, so the loan isn’t going to balloon into something that’s impossible to repay in the future when you sell the home.
- Receive Steady Income – Depending on the type of reverse mortgage and your preferences, it is possible to use it as a way to bring in a steady amount of income. If you’d like to hold off on using your retirement a little longer or supplement your retirement finances, a reverse mortgage is a way to do that without worrying about making payments on a huge loan each month.
Cons of Getting a Reverse Mortgage
While there are tons of benefits of a reverse mortgage, there are some cons as well. It is important to understand the cons so you can decide if this is the right option for you and if it’s going to be a good idea to get a reverse mortgage to access the equity in your home.
- Lose the Equity in the Home – The equity in the home is what gives you income as a lump sum or on a monthly basis, so the equity will be used up to repay the reverse mortgage when the home is sold. This means you won’t get the equity if you decide to sell the home.
- Won’t Have the Home as an Inheritance – If you pass, the home will be sold to cover the reverse mortgage. This means it will not be available to leave as an inheritance to your children or other relatives.
- You May be Ineligible for Other Benefits – If you accept a lump sum or the payout isn’t structured properly, it’s possible you’ll be ineligible for Medicaid or Supplemental Security Income in the future. It’s best to consider this carefully before obtaining a reverse mortgage.
- There May be Occupancy Requirements – If you end up moving into a retirement home or have to leave your home for another reason earlier than planned, you could end up having to pay all of the fees for the reverse mortgage and will not receive the benefits you planned on getting.
A reverse mortgage may be an excellent way for you to tap into the equity on your home and bring in some extra money, but it may not be the right solution for you. Take the time to look into the options for a reverse mortgage carefully and learn more about the specific pros and cons of the one you’re interested in. This way, you can determine if this is the right option and, if so, if the one you’re interested in is the best choice for your situation.