If you have a mortgage, you may have heard about a way to have a mortgage loan that requires no payment. This may sound surreal, but it is known as a reverse mortgage. As opposed to the traditional mortgage loan that is repaid over time, the reverse mortgage is designed for the homeowner to receive payments from a lender. When this occurs, you have the option to collect a lump sum amount, a line of credit, or payments made on a monthly basis.
The loan fees and all interest become part of the balance every month. Therefore, as time goes by, the balance also grows, while there is a monthly decrease in the home equity. While all of this happens, the home remains yours and the title to the home is yours, and you only pay the balance if you decide to sell the home and move or when the homeowner passes away. If the death of a homeowner occurs, then the home will be sold and proceeds will go towards paying it off. When there is remaining equity, the estate will acquire it.
Now that you know what a reverse mortgage is, let’s take a look at the Pros and Cons!
Pros of a Reverse Mortgage –
When you are having a hard time making bill payments, it may be a good time to look into a reverse mortgage. A reverse mortgage will provide you with a new income stream to help relieve some burden.
Retirement Can Be Secured:
Having a reverse mortgage while retired can provide a lot more extra cash during retirement. Having this extra cash will come in handy during retirement and can cover other expenses that may arise.
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The Home Remains Yours:
A reverse mortgage allows you to obtain the equity that the home has accumulated instead of waiting to sell the home to have the equity liquefied. This prevents you from having to downgrade due to having to make a move.
The Current Loan Will Be Paid Off:
When you have proceeds from a reverse mortgage, you can use it to pay the balance of a current mortgage. Having this ability to pay one mortgage by using another can make more money available for other purchases.
No Liability for Taxes:
The IRS considers the proceeds from a reverse mortgage as an advance from a loan and not a source of income. The funds you receive will not be taxed.
Cons of a Reverse Mortgage –
Though there are many Pros to having a reverse mortgage, there also remain a few Cons to be aware of. We will discuss a few of the more common ones below.
Foreclosure Could Still Take The Home:
Just like any other type of mortgage, you need to be able to afford it and this means you still need to be able to pay the property taxes and all other fees and insurance requirements. Your home must also be lived in for the majority of the time you own it. If delinquency in payments occurs or any other negative stipulation occurs, then the home could default and lead to a foreclosure.
Less inheritance:
A home has the ability to create wealth for generations. However, to pay the reverse mortgage, the home needs to be sold. This means when the home is sold, their heirs will likely receive less than what the home is valued for. This will sometimes lead the heir to turn the home over to a lender in order for the loan to be paid in full. Besides that, the equity in the home decreases the longer you have a reverse mortgage. Depending on the amount, there may be no equity left at all.
Other retirement Impacts:
Although you may not need to pay taxes for income, you may see an impact on other retirement resources such as SSI or Medicaid. Make sure to know what else may be impacted if you have a reverse mortgage.
Is A Reverse Mortgage Right For You?
Having a reverse mortgage is a good way to have extra income during your retirement years. However, you also need to be aware of what the Pros and Cons will be. This way you will be well informed and ahead of the game throughout retirement. Click Here to see if a Reverse Mortgage might be a good option for you!
