If you have some financial knowledge then I am sure you should know about reverse mortgage. There are many companies now that are offering reverse mortgage and it is also frequently promoted on various platforms. Reverse Mortgage basically helps old home owners to get financial help by putting their property on equity. These type of products are made for people of above 62 so that they do not have to worry about money in the older age. This could beneficial sometimes and sometimes it could be opposite. So today we will discuss about this we will go through the pros and cons of reverse mortgage and in the end you will be able to calculate whether it is beneficial for you or not.
If you know what a reverse mortgage is then, let me tell you about this. Reverse mortgage is basically a process that allows you to have equity on your home. But this loan is kind a different from others equity or credit loans as you do not have to pay any payments to payback the amount. You can still live in the house with all the freedom. So if your home is worth a huge amount, then you can apply for a reverse mortgage and if you get you will be able to receive lump sum payment of your home value or you can take an amount on monthly basis to make a living. But to qualify for these loans, you need to fulfill some requirements such as you should completely own the house and secondly you must be more than 62 years of age.
The loans were introduced by private companies in the 1960s and after the 80s the loans were also introduced by the US Department of Housing and Urban Development as HECLs loans. The loans that are administrated by the Department of Housing and Urban Development are insured by the Federal Housing Administration. There are some scams related to reverse mortgages so it is always advised that you should only take loans form those lenders which are approved from FHA.
This type of loan is best for those people who have failed to make a retirement fund or those who do not have any money left. This program can help them make a living without worrying about the repayment plans. But as I said that this may not be the ideal case for everyone, so let see what advantages this loan can bring in.
The Pros of Reverse Mortgage
As I said that reverse mortgage has its own ups and downs for every person so let us analyze the pros of reverse mortgage. One of the biggest benefit of a reverse mortgage is that it can become a source of income for you if you are in an older age. Every person that retires need some amount to fulfil their needs, the amount they get from Social Security Program is not enough to make a living. If you were good in your finances than you would have made a retirement plan or you would have some source of pension. But if you were not that good at your finances than you it could be curtains for you because there is no income source for you now. The solution to this problem is reverse mortgage, you can go for equity on your home and then you can get a source of income for yourself. Financial experts always suggest that reverse mortgage should be your last option. If you have a 401k or any other retirement or investment account, you should use that money. After that when you have no other option left, then you should go for a reverse mortgage.
Another benefit of a reverse mortgage is that when you have a reverse mortgage, it enables you to live in the same house. Living in your own home also have expenses, such as you have to pay the property tax, community fee and insurance etc. Paying all these charges without a proper source of income is very difficult but if you have a reverse mortgage, it would pay you an enough amount in which you will be able to pay the charges and also make a living. By this way you can stay at your home and keep it on your own name while you get cash from it.
One the biggest benefit and the reason of choosing this loan is that you do not have to pay it back. When you have a mortgage loan, you definitely pay it back and you have monthly payments with interest. However, when you have a reverse mortgage, you do not have to pay it back. For example, if your house got a total of $180,000 payment. You will have that amount completely and you can stay in the house for as long as you want. After you move out or pass away, the company sells the house to recover the loan. You do not have to pay any money in fee or interest and all the fee is added in to loan balance.
You have the choice to choose the way through which you want to receive your cash, you can either have a lump sum payment at once or you can also set up monthly payments. If you want to make a living then monthly payments are the best option or if you have some large expenses to pay then lump sum is the best option. You get the lump sum with a fixed rate and the monthly payments with variable interest rates. You can have your payments in 5 different terms, firstly you can get equal payments as long as you stay in the house or alive. Secondly, you can get fixed amount of monthly payments for a specified period of time. The third option is that you can keep the money and access it whenever there is a need of cash. You can use third option with the other two options combine as you can receive money on monthly basis and can a have access to the total amount whenever you want.
Apart from these benefits, reverse mortgage also have more benefits and one of them is that you will receive the money tax free and you will not have to pay any kind of tax as the amount is considered as a loan and you can spend the money wherever you want because there is no restriction. Apart from that you will not face any consequences of the loan as you cannot get more money than the value of your home.
Cons of Reverse Mortgage
There are also some disadvantages of reverse mortgage. One of the disadvantage of reverse mortgage is that they equity money is your own money and it does not make sense on paying interest and fee on your own money. There are cheaper ways to have access to your cash, such that you can put your money in to a 401k or IRA account, in this way you can invest money and could earn money on that.
Another drawback of reverse mortgage is that it could be expensive, when you will calculate the expenses of the loan, you will be amazed to know that how much it costs. As you do not have to pay any repayments in the process but still there are some costs that you need to pay. The rates you get in a reverse mortgage are much higher than the traditional mortgages. Apart from these high rates, the origination fee, the mortgage insurance premium, the closing cost, the appraisal fee and the service charges makes up a big amount that you have to pay at the end.
It is not like that that you will not pay the loan back, although it allows you to stay in your home while you have the loan but when you move or die, the bank sells your precious property that you have gained by working so hard. If you face any medical issues, in which you have to do a long time treatment, then you will have to sell the house and repay the bank in one year of that time. If you have other people living in your home and you have a reverse mortgage, after your death, other people will be forced to move out as the bank will acquire the place.
Reverse mortgage can cause a big loss to your children because when you will die, the bank will sold the house you have so definitely your heirs will loss an asset that once belonged to them. Your heirs can repay the loan if they can and save the home but it is difficult in most of the cases as the amount owed by the deceased person is higher so it becomes difficult. Also sometimes the amount increase from the property value and your heirs have to pay them from their money.
So these were the pros and cons of a reverse mortgage, if you have children than you should not consider mortgage. You should only consider this loan when there is no other choice left to get money as it is costly. Do comment in the section below and let us know how much you gained from this article.