For the past 15, 25 or 30 years, you’ve made monthly payments on your home loan—until finally the day you paid off your mortgage in full came. Paying off your mortgage not only means you own your home entirely, it also means you can take advantage of your home’s equity if needed. One of the ways to tap into that equity is through a reverse mortgage. The big difference between traditional, or forward, mortgages and reverse mortgages is who is being paid. With a traditional mortgage, you’re paying the lender. With a reverse mortgage, the lender pays you.
Who Is It For?
Reverse mortgages are generally for people who are over age 62 and live in the home they are borrowing against. According to the Consumer Financial Protection Bureau, the regular mortgage on the home typically needs to be paid off or mostly paid off before you can take out a reverse loan. If you still have a mortgage, you’ll need to use the proceeds from the reverse mortgage to pay off the original loan.
Why Would You Want a Reverse Mortgage?
Although you are borrowing against your house, you don’t have to worry about making payments on the loan for as long as you remain in the home. The loan can open up an income stream for you during your retirement or can provide you with some cushion if your retirement income isn’t enough.
What Are Your Options?
Not all reverse mortgages are the same. According to the Federal Trade Commission, there are three types. One type, a Home Equity Conversion Mortgage (HECM), is insured by the Federal Housing Administration. Another type, a single-purpose mortgage, is often offered by the government or a non-profit group. A single-purpose mortgage can be used to cover specific costs only. For example, you might use a single purpose loan to pay for the property taxes on your home or to pay for repairs. The third type of loan comes from a private lender and is known as a proprietary reverse mortgage. Generally, the amount you can borrow with a proprietary loan is higher than the amount you can borrow with a HECM or single-purpose loan.
Are There Drawbacks?
Reverse mortgages might seem too good to be true: A lender gives you money and you don’t have to pay it back, provided you remain in the house. However, the reverse mortgage loan reward is balanced out or outweighed by risk. For one thing, many loans have high interest rates or fees, which means the actual payments you get will probably be less than you expected. Another drawback is that the loan does have to be repaid at some point, either after your death or after you’ve moved out of the home.
Treat a reverse mortgage like you would any home loan. It pays to shop around and to read the fine print to make sure you can really afford the cost of the loan.
Image source: Flickr
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