If you are retired and struggling to pay your bills on a fixed income, a reverse mortgage may seem appealing. However, reverse mortgages come with fees, so it is essential to understand the terms in advance.
Reverse mortgage lenders impose substantial fees and closing costs, and borrowers are required to pay refinance reverse mortgage company insurance. Reverse mortgages may also come with variable interest rates, which could cause your overall costs to rise over time.
If you believe a reverse mortgage could help you remain in your home during retirement, it is important to understand the risks and benefits so that you can make an informed decision.
What Is Reverse Mortgage Lending?
A reverse mortgage is a loan option that allows householders who have paid off their mortgage in full or in large part to access their home equity. Reverse mortgage funds are structured as lump quantities or revolving lines of credit that can be accessed on an as-needed basis.
In contrast to a conventional mortgage, where the balance decreases over time as payments are made, the reverse mortgage balance increases monthly as interest and fees are added. The loan balance is not paid until the property is sold, whether due to the borrower's death or relocation.
Positives and Negatives of Reverse Mortgage
In spite of the fact that a reverse mortgage may seem like a good method to access cash in your golden years, it's important to understand how this loan works. Here are the advantages of a reverse mortgage, as well as what to watch out for when comparing this loan option to others.
Pros
If you're concerned about your capacity to cover living expenses and other financial obligations, a reverse mortgage could be your lifeboat.
A reverse mortgage allows a homeowner who would otherwise have to downsize to remain in their residence.
Compliant borrowers are not required to make payments until the property is sold.
If the value of your home falls below the balance of your reverse mortgage, your beneficiaries will typically only pay the difference, not the entire balance.
Many reverse mortgages have no credit or income requirements.
Cons
However, the disadvantages of a reverse mortgage outweigh the advantages for many homeowners. Before taking out a reverse mortgage against your residence, consider these risks.
There are a number of reverse mortgage scams that target senior citizens in need of funds for daily expenses.
There are additional fees associated with reverse mortgages, such as origination fees and mortgage insurance of up to 2.5% of the home's appraised value.
The majority of interest rates are variable, which means they can rise over time and increase the cost of borrowing.
Borrowers owe more over time because interest accrues on a growing loan balance, as opposed to the loan balance decreasing over time.
Unlike traditional mortgage payments, reverse mortgage interest is not tax deductible.
A reverse mortgage can diminish your home's equity and, consequently, your family's inheritance from your estate.
