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Home Stuff

The Pros and Cons of a Reverse Mortgage

by clnews
October 25, 2019
in Stuff
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For someone who is at least 62 years old, your home equity becomes a considerable asset that you can convert into cash through a reverse mortgage. This may sound straightforward and simple, but it is vital to understand first how a reverse mortgage works. Since there are different types of reverse mortgages, not all will be suitable for your needs and circumstances.

The basic principle of a reverse mortgage is borrowing against your home’s equity, without needing to sell your property. There are no monthly dues, but you are required to keep paying taxes, home insurance, and other costs. Every reverse mortgage company structures their offers differently. But what is more important, before you considering applying, is to know the pros and cons of a reverse mortgage. Understanding the benefits, along with the potential consequences of this type of mortgage, will help you make a sound financial decision.

How do you benefit from a reverse mortgage?

The obvious advantage of a reverse mortgage is converting your home’s equity into cash. There is no need to sell your property and find new living arrangements. You can use the extra funds to augment living expenses, in case you are already short on your retirement funds. Other significant benefits of applying for a reverse mortgage are:

  • You get to keep your home. You don’t lose ownership of your home after applying for a reverse mortgage. As long as you keep paying taxes on time, are not delinquent on your homeowner’s insurance, and pay for housing costs, your house is yours.
  • No mortgage payments due. Unlike a regular home equity loan, reverse mortgages do not include monthly payments. The only time you are required to pay back the loan is when you decide to move out. Even so, selling the house will pay off the debt.
  • Payment options are flexible. There are different ways you can borrow through a reverse mortgage. You can get a line of credit, a lump sum payout, or a lifetime payment plan. Essentially, you can turn your home’s equity into a source of funds.

Additionally, the money you get from a reverse mortgage is considered a loan. As such, it will not affect your social security benefits or your Medicare plan.

What are the downsides of a reverse mortgage?

Every loan, no matter how attractive, has its caveats. Some of the things you need to consider before you apply are:

  • Closing fees and interest. The lender will charge fees and other closing costs, which is on top of the interest. Although you are not required to pay the fees and interest outright, you will get less when you decide to sell your property.
  • Non-tax-deductible. Since you are not paying interest while still occupying the property, you cannot claim tax deductions on it. You will only get tax deductions once the interest is paid in full.
  • Taking out a reverse mortgage also impacts the amount your heirs will inherit. When the house finally gets put on the market, the lower equity also means lower cash value from the sale.

In conclusion, the benefits of applying for a reverse mortgage are still considerable. Nonetheless, it is best to know all the implications first before making a final decision to apply.

Tags: reverse mortgage companyreverse mortgage pros and cons
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