Many of us find ourselves looking for additional sources of income when we reach retirement age. If you’re 62 or older, a reverse mortgage could provide you with some extra money. However, you should carefully weigh this option before going forward.
With a traditional mortgage, you make monthly payments to your lender. A reverse mortgage allows you to receive payments, taken from your home equity, from the lender each month. The loan is repaid to the lender when you die or sell your house.
The amount you can borrow depends on your age, the value of your house, and the interest rate. For many, reverse mortgages are considered a last resort. For some (like those that are seriously in need of cash), it is the perfect solution!
The Federal Trade Commission says there are some important factors to contemplate of if you’re considering this type of mortgage, including:
- Extra fees: Extra fees can be involved. You might see a loan origination fee, a mortgage insurance premium and other closing costs and service fees.
- Variable rates: You’re usually dealing with variable rates. Fixed rates are rare for reverse mortgages. Rates are more often tied to market conditions and so variable rates are what you’ll see. That means the amount you’re paying for the loan can change from month to month.
- Increased interest: Interest is charged on your outstanding balance. It’s added to the amount you owe each month, ultimately your total interest and debt is increased.
- Homeowner expenses: You are still the owner of the home and are responsible for things like property tax, insurance, maintenance and all the other expenses that come with being a homeowner.
- Lingering interest: You can’t write off your interest on your reverse mortgage until the loan is paid off.
- Bait and switch tactics: Shopping around is important. The FTC urges you to educate yourself. Be aware of sales pitches. If someone comes to you about pursuing a reverse mortgage, perhaps suggesting you use it to pay for home improvements, be wary. Another red flag is if you’re being offered additional financial products, like an annuity or long-term care insurance.
- Cancellation periods: You have the right to cancel. This period is typically three days. You won’t be penalized, but you must make it known in writing. Send the cancellation by certified mail. Document the time and date you sent the letter and when it was received.
A reverse mortgage can be advantageous if you know what you’re in for and you don’t deplete your equity too early. Whether you wish to pursue a reverse mortgage or are in the market for a traditional mortgage, now’s a good time because interest rates are going up.
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