A reverse mortgage is a loan that allows homeowners age 62 and older to convert the equity in their home into cash without having to make monthly mortgage payments. The loan is repaid when the borrower dies, sells the home, or permanently moves out. When applying for a reverse mortgage you can choose how you want to receive the money. You could take a line of credit if you don’t need all the money immediately, saving on interest costs. You can also take a lump sum if you have large expenses such as medical bills. While this may seem like a great way to cover unexpected bills during your senior years, there are pros and cons to this approach. We share the types of reverse mortgages below.
3 types of reverse mortgages
- Home Equity Conversion Mortgages (HECM’s) are the most common type of reverse mortgage. These loans can be used for any purpose, including buying a new home. With this said, a home purchase will require a large down payment.
- Single-purpose reverse mortgages are typically offered by government agencies and non-profits. As the name suggests, the lenders limit what these funds can be used for.
- Proprietary reverse mortgages are offered by private lenders for any purpose. These types of loans are typically reserved for homeowners that don’t meet the FHA requirements for a HECM.
Pros of a reverse mortgage
- Quick access to funds: If you need funds for help with expenses, this loan will allow you to receive assistance without the need to move.
- Delayed payments: Most loans require repayments to begin immediately, but this loan allows you to access the money you need without worrying about repayment.
- Tax-free: Reverse mortgage payments are considered loan advances and therefore are not taxed by the IRS.
Cons of a reverse mortgage
- Costs: When applying for this loan there are costs. These costs include an appraisal, servicing, origination fees, and other closing costs. In addition, you will have to pay for your previous mortgage, if applicable.
- Loss of the property: If you fail to maintain the property or pay the applicable fees, the lender could foreclose on the property.
- Leaving the property to your heirs: If your children intend to keep the property after you pass away, they will need to either pay off the mortgage or refinance the loan.
- Age requirements: If one spouse is under the age of 62, they may need to be removed from the deed in order to qualify for this loan. Without their name on the title, the non-borrowing spouse could lose the home should their partner die.
A reverse mortgage may not be ideal for everyone. However, for homeowners that have a lot of equity in their home and plan to remain in it for a long time, this loan can free up some cash for additional expenses. As always, it is important to consult your mortgage broker and tax advisor when considering a reverse mortgage.
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