What is a Reverse Mortgage?
A reverse mortgage is a type of home loan that lets you convert a portion of your home equity into cash. Essentially, the equity that you built up over years of making mortgage payments can be paid to you. Generally, you don't have to pay back the money for as long as you live in your home. However, when you die, sell your home, or move out, you, your spouse or your estate would have to repay the loan.
Types of Reverse Mortgages
There are 3 types of reverse mortgages:
- Single Purpose Reverse Mortgages - These loans are the least expensive option when considering a reverse mortgage. They are offered by some state and local government agencies, as well as non-profit organizations. However, they're not available everywhere. These loans may be used for one purpose only, as specified by the lender. Most homeowners with low or moderate income can qualify for these loans.
- Proprietary Reverse Mortgages - These are private loans that are backed by the companies that develop them. If you own a higher-valued home, you may get a bigger loan advance from a proprietary reverse mortgage. Even if you have a small mortgage, you might qualify for more funds if your home has a higher appraised value.
- Federally-Insured Reverse Mortgages - These loans are backed by the U.S. Department of Housing and Urban Development (HUD). These may be more expensive than traditional home loans, but can be used for any purpose. While the amount you can borrow varies based on several factors, in general, the older you are, the more equity you have in your home and the more money you can get.
Advantages of a Reverse Mortgage
There are several advantages to using your home as collateral to get cash in your pocket:
- Reverse mortgages are considered loan advances to you, not income you earned. Thus, the payments you receive are not taxable.
- Reverse mortgages typically do not affect your Social Security or Medicare benefits.
- No credit check or income verification is required.
- The loan doesn't have to be paid back until the home is no longer your primary residence.
- The borrower never pays back more than the value of the home at the time of sale, even if the loan balance is more.
- You retain full ownership of your home, and control what happens to it.
Disadvantages of a Reverse Mortgage
Just as there are several advantages, there are also several drawbacks to getting a reverse mortgage:
- As part of the process, you'll have to pay loan origination fees, appraisal fees and a hefty upfront mortgage insurance fee of 2% of the value of your home. This can make reverse mortgage an expensive proposition.
- Your debt (plus interest) is constantly rising.
- While you get to keep the title to your home, the bank owns a little more of it everyday.
- You are still responsible for taxes, homeowner's insurance and upkeep. If you can't make those payments, you'll default and the entire loan balance would become due. If you can't pay that balance, you'd be at risk for losing your home.
- Think about what you want to leave behind for your heirs. Depending on the amount you borrow with a reverse mortgage, there may not be anything left when you're gone and the loan is repaid.
Is A Reverse Mortgage Right For You?
Because of their advantages and disadvantages, reverse mortgages are fantastic options for some homeowners and not for others. Your mortgage lender will be able to work with you to determine whether or not a reverse mortgage makes sense for your unique situation.
Of course, in order to be able to take out a reverse mortgage, you have to have a home in the first place! If you're thinking about relocating to the Lake of the Ozarks or if you're looking for homes for sale in Osage Beach, MO, give us a call. Our team of experienced real estate agents would be happy to help you in any way we can.
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