The number of seniors taking out a reverse mortgage is increasing year by year as retirees are finding that they do not have enough money to fund their retirement. If you are thinking about taking out a reverse mortgage, as with any other big decision it is important to make sure that you know exactly how such a loan works and whether it is a good decision for you.
- You continue to retain the title and live in your home. You still have to pay your property taxes, insurance and maintenance.
- You receive the proceeds of the loan as tax-free cash and you can use it however you wish such as pay off debts or travel.
- You do not make any monthly mortgage payments until you decide to move or sell then the full loan becomes due. You have the option to pay off the full amount of the principle and interest at any time though you may be charged a fee to pay off your loan early.
- A reverse mortgage is a non-recourse loan. You and your heirs are not responsible for any amount of the mortgage that exceeds the value of your home as long as you have paid all the property taxes and insurance.
- You can usually decide how you want to receive the funds, all at once or to advances over time.
- Interest rates are higher than other secured lending options as there are no monthly payments required.
- The balance of the loan increases over time as does the interest on the loan.
- If you default on the reverse mortgage you will have to pay back the entire amount due on the loan. Lenders may have their own definitions of defaulting on your loan but in general ways you can default include:
- Using the money from the reverse mortgage for something illegal
- Being dishonest in your mortgage application
- Letting your house fall into a state of disrepair thereby lowering its value
- Not following the conditions that you agreed to when you took out the mortgage.
- When you die, your estate will have to pay back the full amount of the loan. If both you and your spouse own your home together the loan will have to be repaid when the last one of you dies or sells your home.
- The amount of time that you or your estate will have to pay off a reverse mortgage will vary. If you die then usually your estate will have 180 days to pay off the loan, but I if you move into long-term care then you could have one year to pay it back. This is important information that you need to get from the lender before taking out the loan.
Costs involved in taking out a reverse mortgage vary depending on the lender but usually include:
- A higher interest rate than for a traditional mortgage.
- A home appraisal fee
- A setup fee
- A prepayment penalty if you pay off your reverse mortgage early
- Legal fees for closing costs or independent legal advice
Costs may be added to the balance of your loan or you may have to pay them upfront.
Taking out a reverse mortgage greatly affects the equity that you will have left in your home when you sell or die, and how much will be left for your heirs. It is usually a good idea to speak to your family, a financial advisor and even your lawyer to make sure that you are fully understand how a reverse mortgage works and whether or not it is the best decision for you.
Your financial advisor may suggest alternatives to a reverse mortgage such as:
- Taking out a different kind of loan such as a personal loan, line of credit or credit card
- Selling your home and moving buying a smaller one
- Selling your home and renting another home or apartment
- Moving into assisted living or other alternative housing.