A reverse mortgage is a type of loan available to homeowners age 62 and older. Instead of purchasing a home and taking out a traditional mortgage, a reverse mortgage allows homeowners to convert the equity in their home into cash.
A reverse mortgage is a type of loan available to homeowners age 62 and older. Instead of purchasing a home and taking out a traditional mortgage, a reverse mortgage allows homeowners to convert the equity in their home into cash.
Reverse mortgages were designed to give seniors an extra source of income to rely on for monthly expenses, medical bills, or whatever they please. There are no limitations on how funds from a reverse mortgage can be used.
Reverse mortgage funds can be dispersed in three ways: either as monthly installments, a line of credit or one lump sum. Borrowers can also receive their funds through a combination of monthly installments and a line of credit. With the line of credit, you are only charged interest on the funds that you use, similar to a home equity line of credit or a credit card.
The amount of money you can access depends on how much equity you have available in your home, your age and your interest rate. During the first year of your reverse mortgage loan, you can take out 60 percent of those funds.
Since most reverse mortgages are backed by the Federal Housing Administration, or FHA, the loan is not due back until the borrower either moves out of the home, sells the home or passes. Borrowers are required to keep up with the maintenance of the home and pay their property and homeowner’s insurance. If they fail to do so, the loan can become due immediately.
If you pay back the loan by selling your home, any leftover money will go to you or your heirs.
Reverse mortgages typically come with a higher interest rate than a traditional mortgage. As with any financial decision, it’s important to do your research and decide what would be the best option for your personal situation. A few things to consider include:
Do you need an extra source of income every month, or are you just wanting to go on an exotic vacation? Depending on your need, there could be a better solution, such as a home equity loan or personal loan.
If you want to leave your home to your children, a reverse mortgage could jeopardize that. When you pass, you’ll have to pay back the loan either by selling it or having your heirs pay it back.
If you want your partner to be able to continue living in the home if you were to pass first, make sure to have them as a co-borrower on the reverse mortgage. This will allow your partner to continue living in the home until he or she passes, too.