Reverse Mortgages: An Overview
It doesn’t come as a surprise that many people are worried about their savings potentially running out within the first decade of their retirement. This has left many, looking for various opportunities to increase their savings, or eliminate any unsecured debt they might have. One of the options many people are turning to is the reverse mortgage.
What is a Reverse Mortgage?
To put it simply, a reverse mortgage is a way to convert the equity that you have in your home into a series of payments that you receive on a monthly basis. In a traditional mortgage, you borrow a lump sum of money against the equity in your new home. You then pay it back over time, along with additional interest. In a reverse mortgage, you pledge the equity that you have in your home in exchange for a monthly payment to you. The payment amount plus the associated interest accumulates and is paid back only when you sell your home, or you or your surviving partner pass away.
What Are Some Advantages of a Reverse Mortgage?
- Any interest that is paid on the reverse mortgage would be tax deductible if the proceeds were used to earn investment income.
- Payments from a reverse mortgage are tax-free income. This means that income-tested benefits, will not be impacted.
- Depending on who you get your reverse mortgage through, the funds can be received in several ways: as a lump sum, a combination of lump sum and regular payments, or regular monthly payments.
- You and your beneficiaries will not be held responsible for any shortfall should housing values drop or interest rates increase.
- There is security in the fact that the amount of
money you owe can never exceed the value of your property.
What Are Some Disadvantages of a Reverse Mortgage?
- In order to maintain a reverse mortgage, you are required to stay in your home. Should you have to move in with family or leave for any other reason, the loan will become due and must be repaid.
- Because of start-up fees and higher rates of interest, reverse mortgages are significantly more costly than traditional mortgages or lines of credit. Early payment of all or a portion of the amount borrowed will likely subject you to additional prepayment penalties. Borrowing against your home will also significantly impact the amount available to pass on to your beneficiaries.
- Reverse Mortgages can also be an expensive way to access some of the value that has built up in your home. Start-up fees can be quite high, and interest rates on reverse mortgages are significantly higher than standard mortgage rates. Start-up fees depend on options selected but generally include things like an application fee, appraisal fee, and costs for any independent legal advice needed. Fees can easily reach between $2000 and $2500, which is then deducted from the principle.
- The amount of capital that you can borrow through a reverse mortgage varies greatly. It is primarily based on factors like geographic location, the type of housing you own, your gender, your age, and the amount of debt you currently have. Depending on these circumstances, a reverse mortgage may not be an option.