Reverse Mortgage: All the Facts.
If you, or your parents, are getting close to retirement age, you may considering how you will pay for your monthly living expenses when you retire. Even with social security and a retirement account, this may not be enough for you to pay your bills. If you are looking for a way to be able to meet your monthly obligations in retirement, a reverse mortgage may be a good choice.
Using a reverse mortgage, people who are 62 years or older can tap into the equity in their homes to pay for living expenses. A reverse mortgage is not like a typical mortgage. You don’t have to make monthly payments. You also don’t have to pay taxes on anything you’ve taken out.
As good as this sounds, a reverse mortgage may not be for everyone. Learn about how reverse mortgages work and who can benefit from this below.
How does a Reverse Mortgage Work?
A reverse mortgage works in the opposite direction of a traditional mortgage. Here the lender pays you in one of two ways;
Fixed-rate: Under this type of reverse mortgage, the owner of the home receives a one-time payment.
Adjustable-rate: Adjustable-rate reverse mortgages offer a variety of options. You can choose to receive monthly payments or use the equity as a line of credit for when you need it. Some adjustable-rate mortgages offer a combination of monthly payments and a line of credit option. Finally, there may be an option to receive monthly payments over a set period of time or for as long as you or your spouse live in the home.
With a reverse mortgage, the owner remains responsible for paying any property taxes and insurance. They also keep the title to their home. A reverse mortgage is paid back when the owner, and eligible spouse, pass away or if they move from the home. Typically, the lender sells the home to recover the mortgage.
Is a Reverse Mortgage Good for Me?
That all depends on your situation. Reverse mortgages have a few drawbacks that you should consider including;
High Fees: Reverse mortgages can be costly. Expect to pay fees for closing, appraisal, loan origination, and servicing, and mortgage insurance premiums. Fees typically range between 3 and 4% of your home’s value.
Short Term: If you plan on moving, a reverse mortgage may not work for you. Since you are required to repay the mortgage when you leave, you may be incurring high fees that just don’t make sense if you are only planning on living in your home for a few years.
choice for you. When you pass away or move from the home, the reverse mortgage will become due. To keep the home, your family must pay the balance due on the mortgage.
If you have no plans to move and won’t be leaving your home to family, a reverse mortgage may work well for you. It can be a great way to supplement your retirement income without the worry of having to pay the mortgage back.
Anything else that I should know?
If you are considering a reverse mortgage, there are a few other things to keep in mind.
- In order to ensure that you have enough money during your retirement, it is often recommended that you do a reverse mortgage when you are older. This can help to prevent the money from your reverse mortgage from being used up too quickly.
- You must stay on top of your property taxes, homeowner’s insurance, and keep your home in good shape. If you aren’t able to do this, you could lose your home to foreclosure.
- Under Federal law, financial counseling is required for a reverse mortgage. A counselor will help you to assess your long-term needs and whether a reverse mortgage is good for you.
If you are planning your retirement, consider what a reverse mortgage may do for your financial situation. For a homeowner who is not planning on moving or leaving their home to another family member when they pass, a reverse mortgage can be a great way to cover your monthly expenses when you retire.