Reverse mortgages are a financial tool marketed toward seniors who are looking to cash in on the equity in their homes. Homeowners age 62 and older can borrow against their home’s value and the loan doesn’t have to repaid until you vacate the property. Reverse mortgages are touted as a low-cost way to create supplemental income streams in retirement but they’re not for everyone. Before you take out this kind of loan, you need to weigh the pros and cons carefully. Here’s a reverse mortgage explained.
What is a reverse mortgage, exactly? With a conventional mortgage loan, you borrow money from the lender and make payments with interest until it’s paid in full. With a reverse mortgage loan, the lender makes payments to you based on the amount of equity value you have in the home. You can use the money as you see fit, which includes paying off any existing mortgage balance on the home. The loan will only need to be repaid if you decide to sell your house or if you die.
If you’re looking to tap into your equity to pay off debt or tackle some home improvement projects, a reverse mortgage is generally easier to qualify for than a traditional home equity loan or line of credit. Typically, there are no minimum income or credit score requirements that you have to meet and you may be able to get a better deal on the interest rate than you would with another type of loan.
Homeowners are allowed to retain the title to the home with a reverse mortgage, which means you can pass it on to your children or other heirs after your death. If you end up moving, you’ll still be entitled to receive any equity that’s left over if you sell for more than the reverse mortgage amount. The same is also true for your beneficiaries and they won’t be held responsible for any equity shortfalls if your home loses value. As an added bonus, you may still be able to quality for the mortgage interest deduction which can offset some of your liability when tax time rolls around.
Reverse mortgages also offer some flexibility in how you can receive your payments. Depending on the lender, your choices may include fixed monthly payments, a lump sum payout or a line of credit. You may even be able to combine more than one of these payment options to help fill in the financial cracks. If you’re already receiving Social Security or Medicare benefits, reverse mortgage payments won’t impact your eligibility.
A reverse mortgage can give your budget a much-needed boost but it can also create some financial difficulties down the road once you leave the home. If you’re having to shell out big bucks for fees or you’re creating an unnecessary burden for your children, a reverse mortgage could be more trouble than it’s worth in the long run. Consulting an estate planning professional or a financial advisor can give you an idea of how well it fits with your situation.