Are you working on your retirement plan? Are you worried about your future? Have you ever listened about A Reverse mortgage? Do you want to know how it works? Are you confused about whether you should choose it or not? Well, all of your questions are going to be answered in this piece of writing. Let us start with its basic concept and then we will proceed to its pros and cons.
What is Reverse Mortgage?
When you buy a house on mortgage you’ve to pay the monthly installment to the lender, and you can declare it your property once you’ve paid the complete mortgage, its regular mortgage.
In a reverse mortgage, you get the monthly installments of your loan from the lender. It’s like you’re living in your house, and you’ve sold it to a person, that person pays you monthly.
In case of your death, your spouse or the government will repay your loan.
To avail of this option of the reverse mortgage, your home equity must be 50%. 2nd requirement is age; to get this service borrower must have the age of 62 or more. 3rd requirement is the house you applied for reverse mortgage must be your primary residence.
There are three types of a reverse mortgage, mentioned below:
1- Proprietary reverses mortgages
2- Single-purpose reverses mortgages
3- Home equity conversion mortgages (HECMs)
Pros of Reverse Mortgages:
Increment in Cash
When you will be retired, you would not have a proper job, and facing decrement in your savings with no further income than a reverse mortgage would come to rescue. A retired person with a house of great equity, can pay off his regular mortgage and can earn some monthly payments all with the help of a reverse mortgage.
If you have a house with more than 50% equity you don’t need to worry about your expenses because you can handle it all by using reverse mortgage it will make your retirement plan more peaceful.
You Can Live in Your House
Do you think you would want to move out of your house at the age of 65? It would be terrible off course. A reverse mortgage allows people to live in their house, between their friends and family. It saves you from the hurdles of selling, buying, moving, and adjusting in the new house, new community, and new environment at that elderly age.
You can still call it your home, it belongs to you. So the sense of security never fades away.
It is Tax-Free
So, we know you’ve been paying taxes throughout your life. As the reverse mortgages consider as loans hence no tax is applicable. You get the payments in a lump sum, in monthly installments, or as a series of credit (or as a combination of all), as you continue to enjoy in your house.
Ownership of the House Still Belongs to You
As mentioned several times, the biggest advantage of a reverse mortgage is that one can continue to live in their house. Reverse mortgages end when the borrower sells the property, move out, or die. In situations like these families have many options as they can sell the property and can pay the debt with this amount and in case the equity is greater than they can keep the amount after paying the loan.
If the equity of the house is much more so they can keep the house by refinancing the mortgage. Lastly, if the amount of loan is higher than families can give ownership to the lender.
Cons of Reverse Mortgages
It’s Not Free
Everything in this world comes with a price tag so this reverse mortgage. This process includes different types of fees like the origination fee, servicing fee, and insurance premiums if it’s insured HECMs. Also, interest is applied over the period of monthly payments. This explains that the amount the borrower owes becomes the source of interest on your loan.
Moreover, rates of a mortgage sometimes change with the market as they’re bounded by financial index; this may result in getting fewer amounts (in case of the lump sum).
Applying for a reverse mortgage too early can result in regret. You may end up without a home, assets, and no equity. Even if you’re living in the house, you still need to pay for a thousand other things but if you haven’t sorted out everything before choosing this option you may end up in a terrible situation. Rushing is not the option in this financial service.
Less or Nothing for Your Heirs
Partner of the borrower can live in the house if they continue to pay the taxes, but they cannot get money from HECMs in case the borrower did not include their spouse in the agreement.
Since you’re earning in the form of a loan from the equity of your house, there may be a chance that your heir will get nothing or less from your assets. Once the loan becomes due you can’t own more amount than the value of your house, this is known as “non-recourse.”
You’ve to Pay the Taxes
As we’ve said earlier, that nothing is free so if you’re claiming ownership to your house than you’ve to pay taxes, fuel, maintenance, bills, and other expenses. If you don’t pay these taxes then the lender may ask you to repay all payments. In case, your lender pays these taxes than your reverse mortgage will include a “set aside” clause, which means lender needs to put a certain amount to pay the taxes and it will cause the reduction in the total payment. In the end, you’re the one who needs to maintain the house.
It’s always good to plan your retirement, but when you go for financial services like the mortgage you should look at whether it’s good for you, suitable for you or not. Like every other thing, the reverse mortgage has its pros and cons; your choice depends on your requirement, equity of your primary residence, and assets. To make a good decision it’s always better to seek advice from experts.