If you are close to retiring you have probably heard about reverse mortgages. These financial instruments are becoming more and more popular among seniors because they offer several distinct advantages over conventional mortgages. However, a reverse mortgage is not for everyone and like any financial commitment it’s important to weigh the pros and cons before proceeding.
A reverse mortgage is similar to a regular home loan with the exception that the interest you pay on the loan is added to the outstanding balance. So instead of making an interest payment each month, the reverse mortgage builds until you sell your property or no longer occupy your house as your primary residence for at least 12 months.
You typically have to be 62 years or older to qualify for a reverse mortgage, although some private lenders make this type of loan available to borrowers as young as 59 1/2 years old. The reverse mortgage allows you to tap into your home’s built up equity in the form of a lump sum of cash, a monthly payment to you, or a combination of the two. The key benefit of a reverse mortgage is that you will never have to make another home loan payment for as long as you live.
The amount of a reverse mortgage that you can get depends on how much equity you have in your house – you do not have to own your house free and clear to get a reverse mortgage – and your credit qualifications. Here is a helpful reverse mortgage calculator that can assist you in figuring out how much you can get.
In the reverse mortgage process you retain the same ownership and title in your property that you have today. Just as with a regular mortgage, the lender places a lien on your house that gets paid off when you sell the property or when you pass away. An important safeguard of a reverse mortgage is that it is a “no-recourse” loan, which means that you or your heirs will not owe more than your house is worth.
While the benefits of reverse mortgages are plentiful, there is an important drawback to be aware of. Because of the extra interest and fees that are added to your loan, you are reducing the amount of proceeds that will go to your heirs once your house is sold. Since you may be reducing the inheritance your heirs will receive, it’s important to discuss this option with your family before making a commitment.