A reverse mortgage is a financial product that allows a homeowner to convert home equity into cash.
A reverse mortgage is an option available to homeowners who are at least 62 years old. A reverse mortgage offers them a good way to finance their retirement. They can use this money to cover healthcare expenses, pay for home improvement, or pay off an existing mortgage. A reverse mortgage provides a line of credit or fixed monthly payments without the need to repay a loan each month. However, before choosing this option, it is important to understand the pros and cons. What can a reverse mortgage do for you?
How a Reverse Mortgage Works
In a traditional mortgage, you borrow money from a lender and repay it in monthly payments while you gradually build up equity in your home. On the other hand, in a reverse mortgage, a lender pays you a monthly sum and gradually purchases the equity in your home. You retain the title to the property and it acts as a security for the loan. The loan is repaid when the owner passes away, sells the home, or the home is no longer the primary residence.
Pros of a Reverse Mortgage
- You choose how you receive the cash, for example, a regular monthly installment, a single lump sum, a line of credit, or a combination of any of these methods.
- Irrespective of how you receive the cash, you do not make payments as long as you live in the home as your principal residence.
- There is no minimum income to qualify.
- According to the Federal Trade Commission, if you receive more cash than what your home is actually worth, you will not owe anything more than the value of your home.
- Cash advances are non-taxable.
- You remain the owner of the home.
- Cash advances have no affect on Medicare or social security benefits.
- After lender fees are paid and the home is sold, the owner receives any equity left in the home.
Cons of a Reverse Mortgage
- You need to be 62 years or older more to qualify.
- You must go through compulsory mortgage counseling and you will have to pay for it.
- Closing costs and loan origination fees can be quite high.
- You may have to pay monthly servicing fees for the term of the loan.
- Reverse mortgages are usually variable interest rate loans.
- The debt increases with time as interest is added to the balance.
- There are limits on the amount you can borrow during the first year.
- There are limits on the mortgage you can qualify for.
- If you fail to pay homeowner’s insurance, taxes, or any other expenses, the loan can become due.
- With a reverse mortgage, you lose the equity in your home and you are left with fewer assets.
The decision on whether you should apply for a reverse mortgage should be made after considering the pros and cons carefully. The Sean Z Mortgage team can help you weigh all the factors before committing to a reverse mortgage. If the terms of a reverse mortgage does not fit with your needs, Sean Zalmanoff can help you with other options. Call Sean Z Mortgage at (314) 361-9979.