Should You Take Out a Reverse Mortgage? A Beginner’s Guide
Is a reverse mortgage right for you? Maybe. If you’re a struggling entrepreneur who needs more operating cash for your business each month, a reverse mortgage could help. There could be other circumstances, as well, in which a reverse mortgage could be helpful. Read on to find out more.
How Will You Know If a Reverse Mortgage Is Right for You?
Homeowners who are 62 years of age or older are often bombarded with advertising to get them to take out a reverse mortgage on their residence. But what exactly is a reverse mortgage and should you take one out? Let’s explore your options.
A reverse mortgage allows homeowners to access the equity they have built up in their homes. This turns it into cash they can use to pay medical bills, supplement their income or even pay off their mortgage in full.
Reverse mortgages come with one major advantage: You don’t have to pay them back while you or your spouse live in the home. However, you have to pay taxes and insurance as well as maintain the residence.
According to the Consumer Financial Protection Bureau, reverse mortgages must be repaid upon the death of the borrower or co-borrower or if the owner sells the house. They must also be paid back if a spouse moves out or dies. The surviving spouse or heirs are not required to pay back more than the home is worth.
The 3 Types of Reverse Mortgages
Also known as a Home Equity Conversion Mortgage or HECM, there are three types of reverse mortgages available to borrowers:
- Single purpose reverse mortgages, which some state and local governmental agencies offer
- Proprietary reverse mortgages, or private lender loans
- Federally insured reverse mortgages, or HECMs
How a Reverse Mortgage Works
Here’s how a reverse mortgage works: Instead of making a monthly mortgage payment, you get an advance on your home equity, which is normally not taxable and will likely not adversely affect your Social Security or Medicare benefits, according to reverse.org.
Keep in mind that if you take out a reverse mortgage when you are young, you might use up all the equity that you have built up in your home more quickly than you thought. Many people wait until they are in their 70’s or even 80’s to take out a reverse mortgage. This way, they ensure the money lasts their lifetime.
Cautions to Keep in Mind
Keep in mind the following things about reverse mortgages before deciding to take one out:
- Reverse mortgages come with costs. Lenders often charge origination and servicing fees and closing costs over the span of the mortgage. Use title loans in Jacksonville to tally up the true cost of the mortgage.
- Interest on the mortgage adds up over time, so your balance grows each month.
- Most reverse mortgages charge a variable interest rate and the interest is not tax-deductible.
- You have 3 business days to cancel most reverse mortgages after you have taken one out. You simply have to notify your lender in writing. To do so, send a certified letter with a return receipt. Be sure to retain copies of all your correspondence.
Be Sure to Shop Around
When you have made the decision that a reverse mortgage makes financial sense for you, your family and heirs, be sure to shop around to figure out which one is right for you. Be sure to compare the fees and costs associated with the mortgage and fully understand those costs and the loan repayment terms. Do not be shy about asking questions. After all, it is your money. You’ve earned it.