Reverse Mortgages: How They Work, Plus Pros and Cons
Ready to learn the truth about reverse mortgages? Good.
A special type of loan that is usually used by senior citizens to convert the equity of their homes into cash is called a reverse mortgage loan.
If you too are a senior citizen and require financial security so that you can enjoy your retirement years without having to worry about selling your home and moving or where to get your finances from, you can opt for reverse mortgage.
Traditional mortgage is a loan against your house, reverse mortgage too is the same, however, the difference lies in the fact that reverse mortgage is not used for purchasing a house or land but to get the equity out of your existing home.
What are the ways in which reverse mortgage works?
A traditional mortgage is usually issued to you in case you want to purchase a property. You have to begin the payments immediately. This allows you to pay the principal over a particular period of time. In case of a reverse mortgage you also get a loan but you do not need to begin payments at all. You may receive annuity like payments that will be given to you for the rest your life. The interest that accumulates over this loan is not to be paid off by you but is allowed to grow constantly. You must be wondering how the loan is paid off then? The answer to that is, in the event of your death, the company that had provided you with the mortgage takes control of the property. If your heir decides on having the property back, then he or she will have to clear your debts.
What are the pros and cons of opting for a reverse mortgage?
There are many pros and cons of taking out a reverse mortgage; some of them are as follows.
- Pro: Relieves you form the burden of mortgage. You may want to retire for long but not being able to do so because you are worried about your mortgage payments. Reverse mortgage relieves you of the burden of making your mortgage payments every month. This is a great relief for you as you have more cash at your disposal.
- Con: It’s still a loan and you lose a bunch of flexibility that you once had: you can’t sell the home, rent it out, etc.
- Pro: Using equity on your home as a retirement fund. You do not need to sell your house; you can just use the equity in your house as your retirement fund. These loans act as a great option for senior citizens as they provide you with a source of cash that will help you meet your unexpected emergency situations, medical care, etc.
- Con: Fees are often high to start the reverse mortgage process, and interest rates can be less than favorable.
- Pro: It is tax free. This loan is completely tax free. The reason behind this is that it is a loan where you receive the loan as either a lump sum or an additional fixed income.
- Con: Your heirs will have a harder time getting the home once you die because you will have exhausted all of the equity.
- Pro: There is no risk of default. In this case your home can not be taken away if you default on the loan. However, when it comes to a traditional mortgage loan your home can be foreclosed in case you default on payments. You should also be aware that reverse mortgage lenders have no claim on your assets or income.
These are a few pros and cons of reverse mortgages; however you must consider very attentively whether or not you want to opt for it.