Since the launch of the first reverse mortgage in the USA in 1961, homeowners have benefitted from this avenue for releasing equity from their home to cover retirement costs or other expenses. The popularity of these loans may have peaked around 2008, but they are still heavily promoted on TV and in media targeting senior homeowners. Depending on your circumstances, they may well be worth considering but bear in mind these reverse mortgage pros and cons first. Reverse Mortgage FAQIn a nutshell, a reverse mortgage allows a homeowner to convert equity in their property into cash. The homeowner transfers equity in the property to a lender in exchange for receiving (instead of making) monthly payments. When the homeowner either dies or sells the property, the balance of the loan is repaid. There are three common types of reverse mortgage in the USA:
Qualifying for a Reverse MortgageTo qualify for a reverse mortgage, you must first have significant equity in your home. For the federally backed loan, you must also be 62 years of age or older. Assessment criteria are based on the appraisal value of the home, not on the property owner’s income or credit score. However, lenders will confirm that the applicant has sufficient funds to cover property taxes and insurance, and applicants must attend mandatory counseling to evaluate their understanding of, and suitability for, a reverse mortgage. As of 2020, the maximum reverse mortgage loan amount stands at $765,600. Common Misconceptions about Reverse MortgagesUntil the 2008 crash, reverse mortgages were seen as something of a last resort in unfavorable circumstances for providing income in retirement. That is no longer the case. Lower borrowing limits now rule out reverse mortgages based on 100% equity. Other common misconceptions include:
The Pros of Reverse MortgagesReverse mortgages are particularly suitable for seniors with no heirs or surviving dependents. They allow you to release cash to cover medical expenses or retirement costs, for example, without selling your home or giving up the title to your property. You don’t have to pay back the loan while you’re living in your home, and revenue is usually tax-free and will not affect your Social Security or Medicare benefits. The Cons of Reverse MortgagesWhen you take out a reverse mortgage, you are reducing equity in your own home, so you have fewer assets to leave your heirs. At the end of the mortgage term, when you sell your home or die, the loan has to be repaid. This amount increases over time as (non-tax-deductible) interest accrues. In addition, reverse mortgages typically charge higher interest rates than conventional mortgages and incorporate origination fees, servicing fees and closing costs, as well as mortgage insurance. In some cases, a personal loan might be a better option than a Single Purpose loan, or even selling a home and downsizing to a smaller property as a means of releasing cash. It’s no secret that most reverse mortgage offers come with compelling sales pitches, which can be harder to evaluate with a cool head when financial circumstances are tight. As with any major financial decision involving property, weigh up the pros and cons with the support of a trusted financial advisor. Sources
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