When people retire, they often have big plans for vacationing and other adventures for their retirement. Unfortunately, retirement often means less income to do all those things they had planned. Often, homeowners find that when they retire, their greatest asset is the equity in their home. A reverse mortgage could be the perfect option to provide the funds needed to enjoy retirement.
What is a Reverse Mortgage?
A reverse mortgage is a loan that individuals who have paid off or are close to paying off their homes can apply for. This loan is secured by their home and provides additional income for retirees. However, individuals should fully understand how reverse mortgages work before applying for such a loan.
This loan option can provide extra money for major events, such as a long vacation or other major purchases to enjoy retirement. Customers can even choose to have a monthly income provided with this loan to help boost their quality of life.
How Does a Reverse Mortgage Work?
With a typical mortgage, homebuyers get a loan to pay for the home and then pay the lender a monthly amount until the loan is paid off. With a reverse mortgage, the lender pays the homeowner. The reverse mortgage allows homeowners the ability to convert the equity in their home to much-needed cash in their retirement.
The money received from a reverse mortgage is not taxable and will not affect the retiree’s benefits, such as Social Security or Medicare. Homeowners get to keep the title to their home and can continue to live in that home. The money is paid back when the homeowner sells the home, no longer lives in the home or dies. The loan can either be paid off by the homeowner’s estate, their heirs or by selling the home.
What are the Benefits of a Reverse Mortgage?
The main benefit of a reverse mortgage is allowing retired homeowners the ability to gain access to the equity they built up in their homes. Many retirees take a large cut to their income when they retire. A reverse mortgage can provide income to allow the homeowner the ability to maintain their normal standard of living without the need to downsize.
The funds can even be used to pay off the remainder of the home’s mortgage. This helps to provide a little extra cash while removing a monthly payment. The money can even be used to enjoy a vacation or other special expenditure to help the homeowner enjoy their retirement.
What are the Cons of a Reverse Mortgage?
There are some downsides to getting a reverse mortgage that homeowners must consider. There are also a lot of reverse mortgage scams. This makes it important for homeowners to find a trusted lender if they choose this option. Homeowners should also be aware of the costs associated with a reverse mortgage, such as origination fees, mortgage insurance, and other closing fees.
Interest payments on a reverse mortgage are not tax-deductible. In addition, interest rates can change and will increase over time, unlike a traditional mortgage that decreases as it is paid. Homeowners must also maintain strict home maintenance requirements and ensure all taxes, etc., are paid on time. Failure to do so could result in the mortgage being due immediately.
There are also other considerations that must be made when considering a reverse mortgage. Any family members in the home that are not listed as borrowers may have to leave when the borrower dies. If family members do not have the funds to pay off the loan at the homeowner’s death, they may not be able to inherit the family home. In addition, if the homeowner becomes ill and must move to a care facility, the loan will become due.
A reverse mortgage could be very beneficial for some homeowners, but it could have dire consequences for others. This makes it important for homeowners to fully understand the process before taking out this type of loan.
