What are Reverse Mortgages?

Reverse mortgages are one of things mortgage professionals always get asked about. Though you may have never heard the term before, these are very common for people over 62 years of age.

A reverse mortgage allows you to access the equity you have in your home in the form of a loan. This is common for people to use during retirement if they are finding themselves a bit short on cash every month. Though it can be a great option for some, there are of course positives and negatives to consider. Let’s investigate a bit deeper.

POSITIVES

• You are able to live comfortably throughout retirement. Payment of the loan can be in the form of a lump sum or monthly payments. The only expenses you will be required to pay are the home insurance and taxes.
• Homeowners are protected through the nonrecourse clause. This means that you will not be permitted to be responsible for more than the value of the home.
• No repayment is required during your lifetime. When you eventually pass on the loan will need to be repaid, but until then you don’t need to worry about it.

NEGATIVES

• It limits the amount of inheritance you pass on. When you pass on your inheritors will need to settle the mortgage or sell the house to pay it off. This also means that the home will not be kept in the family.
• If you cannot keep up with the home insurance and tax payments the lender can make the full amount due then and there, possibly resulting in bankruptcy.
• Reverse mortgages are sensitive. If you rent or sell the home, move away, take out a new debt, or change the home’s zoning or title the lender can retract the loan.
• Interest rates can be extremely high. Though the lender will not allow you to go over the value of the home, the interest rates can cause there to be nothing left upon its sale. A high interest rate can also limit the amount you can borrow for retirement.
• If you or your spouse passes on the home may need to be vacated and have the mortgage paid. This means one of you could be left homeless. In order to counteract this you need to keep the loan amount to a minimum of total equity so selling the home will cover the loan expense.

Though there are many negatives in this list there are still situations in which a reverse mortgage is the perfect fit. If you are nervous about this option then it’s probably not for you as it comes with such high risk. A great option to always consider if you’re worried about finances throughout retirement is to sell your home and downsize to something smaller.

This gives you a very brief overview of reverse mortgages, and there are many requirements to qualify for this type of loan. If you would like more information on reverse mortgages and retirement you can always ask your local bank or mortgage professional, or contact AC Lending!