For many people, buying a home is the largest purchase they will ever make, and homeownership can be a lifelong investment. Typically, taking out a mortgage is a critical step of the home-buying process. However, a mortgage is not a one-size-fits-all loan, and applying for one looks different based on your income, credit score, and life circumstances.
There are so many mortgage lenders out there who offer a variety of loans with different terms and interest rates, so it is incredibly important to do your research to ensure that you are getting the fairest deal possible.
While people usually spend a great deal of time, energy, and money figuring out how to begin their journey to homeownership, few people take the end of this journey into consideration. If you are a homeowner over the age of 62, a reverse mortgage could be a good option for you. Just make sure you understand the pros and cons that may come with this type of mortgage, as it is not the perfect choice for everyone.
What is a Reverse Mortgage?
While a mortgage is a loan that helps people purchase a home by making monthly payments, a reverse mortgage is a type of loan that allows senior citizens to receive monthly payments (or a lump sum or line of credit) that are taken out of their home’s equity. In other words, instead of not having access to your home’s value until you sell it or it becomes part of your estate when you pass away, a reverse mortgage provides seniors with immediate cash income at an age when they may need it the most.
There are three different types of reverse mortgages available: a home equity conversion mortgage (HECM), a proprietary or “jumbo” reverse mortgage, and a HECM for purchase. HECMs are the reverse mortgages that are used most commonly, as they deal with homes that are valued below $765,600. Homes with a higher value than this fall into the jumbo reverse mortgage category. Finally, a HECM for purchase loan is only used if you want to buy a different home than your current one.
Reverse Mortgage Advantages
Home equity is a significant source of wealth for seniors aged 62 and older. Many older adults have owned their current homes for decades with no plans to sell or move, even as home prices have steadily risen across America. Reverse mortgages allow seniors to benefit from their home’s appreciated value in the form of cash or credit, when they otherwise would not have access to this wealth unless they sold their home.
According to the National Council on Aging, over 15 million senior citizens are considered economically insecure and have trouble paying for basic living expenses. For seniors who are retired and living on a reduced pension, Social Security payments, or other form of fixed income, a reverse mortgage provides much-needed income. Plus, a reverse mortgage allows you to retain ownership of your home and does not require you to make any monthly payments.
If you are interested in seeing if a reverse mortgage would be a good financial decision for you, an online calculator is a simple and cool way to calculate your reverse mortgage.
Reverse Mortgage Disadvantages
Like with regular mortgage lenders, there is a wide array of reverse mortgage lenders to choose from. Unfortunately, some of these lenders include untrustworthy companies that prey on the elderly for financial gain. Just as you would when taking out a mortgage to purchase a home, it is essential that you conduct research on different lenders when considering a reverse mortgage. Compare different offers, read reviews, and speak with a reverse mortgage counselor or financial adviser in order to avoid fraudulent lenders.
In addition to the possibility of scams, there are other potential downsides and limitations to reverse mortgage loans. While you receive money up front with a reverse mortgage, you are also spending down your home’s equity and increasing your personal debt. There is also the chance that you could outlive the terms of your mortgage, or not be able to pass your home onto your spouse or children after you die.
Reverse mortgages only apply to houses, condominiums, and townhouses; they cannot be used for mobile homes, co-ops, or multi-family homes with more than four units. Additionally, you have to live in your home in order to be eligible for a reverse mortgage, meaning that vacation homes and rental properties do not apply. You must either own your home outright or have at least 50 percent equity in the home, and you are still responsible for keeping up with home repairs, maintenance, insurance, and property taxes. Otherwise, your home could be at risk of foreclosure and your reverse mortgage loan payment would be due in full at that time.
All of these factors are very important to take into consideration if you or a loved one are contemplating a reverse mortgage.