A reverse mortgage can make good financial sense if you are an older person with a lot of equity in your home but are currently strapped for cash.
If you are 62 years of age or older and no longer have a preexisting mortgage or owe very little on your existing mortgage you can transform your home equity into cash. This can be done with no increase in your taxes and shouldn’t affect your Social Security or other benefits. You don’t even have to give up the title to your home.
As with any mortgage, you may be responsible for paying a number of fees and closing costs to obtain the loan. Unlike a traditional mortgage or home equity loan, however, the principal and accumulated interest is not due until you sell your home or move out under most circumstances. Your loan may become due immediately if you fail to keep up with your normal homeowner’s expenses including property taxes and homeowner’s insurance.
If you die before the loan is paid off, the loan will be paid directly from your estate. Any remaining equity in your home will go to your heirs. Any other assets in your estate will remain untouched. With a reverse mortgage you don’t have to worry about passing your debt on to your estate or heirs.
If you are in the market for a reverse mortgage make sure it comes with a “nonrecourse” clause or you may end up owing more than your home is worth.
There are three basic types of reverse mortgages you may qualify for. These include:
Single-Purpose Reverse Mortgages
Single-purpose reverse mortgages are offered by a number of local and state government agencies as well as numerous nonprofit organizations. These low cost loans are usually intended for seniors with low to moderate income and can only be used for one purpose defined by the agency or organization that provides you with the loan. Seniors are typically granted these loans to pay off taxes, do home improvements or pay off other debts.
Home Equity Conversion Mortgages (HECMs)
Home Equity Conversion Mortgages (HECMs) are federally insured and backed by the U.S. Department of Housing and Urban Development (HUD). To qualify, you must meet with a loan counselor from an independent government approved housing counseling agency who will explain all of the related costs and any alternatives that may be available. If you have to move into a nursing home or are under other medical care your loan will not be due until a year after you leave your home.
Proprietary Reverse Mortgages
Proprietary Reverse Mortgages are offered by private companies.
With both HECMs and proprietary reverse mortgages, the upfront costs may be very high and it may not be in your best interest to take out this type of loan if you don’t plan to live in your home much longer. Your age, income, current interest rate and both the value and location of your home will also influence the amount of cash you may qualify for with these type of mortgages.
The money you could get from a reverse mortgage can be quite useful in your retirement years. If you just want extra money available on the side you can receive payments in the form of monthly cash advances or have mortgage funds available in a new line of credit.
If used properly, a reverse mortgage can provide a nice financial boost that could prove the difference between penny pinching all the time or living a relaxing retirement free of financial woes.
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John Campbell is the writer and editor of CashBuzz, A financial portal for the rest of us. Check out cashbuzz.com for the latest articles on money management and tips and tricks that can help improve your finances. This article may be reprinted on your Web site if the copyright, author information, and active link are included.
