Homeowners at or over 62 years of age may qualify for a reverse mortgage. It allows you to use the equity in your home to cover expenses by putting cash in your pocket. You can also use a reverse mortgage to secure a new line of credit.
Reversal mortgages do not come with monthly payments like traditional home loans. Instead, the money is paid back by your heirs when the property is sold. If your inheritors decide to keep the property, they can pay off the mortgage.
While there are benefits to a reverse mortgage, there can also be downsides. You want to look at both before applying.
Benefits of a Reverse Mortgage
It’s not uncommon for retirees to have most of their wealth invested in their homes and little in savings. A reverse mortgage turns your home into a liquid asset. You can use the extra cash for travel, living expenses, or home improvement projects. There are no set regulations on how you spend the money.
Pay Off Your Current Mortgage
You can get approval for a reverse mortgage even if you still owe on your current loan. Using the money to pay off your existing mortgage can help ensure you remain in your home.
Eliminating mortgage payments frees up additional financial resources you can use to fund your retirement.
A Reverse Mortgage is Tax Free
The IRS does not tax funds from a reverse mortgage. The agency considers it a loan since the mortgage is paid off by your inheritors.
Income from most other retirement accounts, like IRAs and 401ks, is taxable. It’s something to consider as you are weighing the pros and cons of a reverse mortgage.
Protection Against Falling Home Prices
Home prices regularly go up and down and it affects the value of your property. A reverse mortgage gives you some protection if your home’s value suddenly decreases.
If the outstanding balance on the reverse mortgage is more than the home’s value, your heirs are not financially responsible for the difference.
Downsides of a Reverse Mortgage
Foreclosure is Possible
A reverse mortgage comes with a few qualifiers homeowners must meet. The house must be your primary residence. You also have to stay current with all costs associated with homeownership. It includes property taxes, insurance, and any HOA fees.
If you do not meet these qualifications during the loan period, you may face foreclosure.
Can Leave Less for Your Heirs
Homeownership builds generational wealth you can lose with a reverse mortgage. The loan is tied to your home’s equity. Instead of passing the property’s value to the next generation, they are paying off the reverse mortgage.
After paying off the loan, the property may not have any equity left to pass down.
Fees and a Complicated Approval Process
A reverse mortgage isn’t free. Along with staying current with ownership costs, the loan comes with an insurance premium. It is usually around 2% of the property’s value. Closing costs are something else you are responsible for paying.
Some reverse mortgage lenders allow clients to add these costs to the loan, but it translates into a smaller loan amount.
Going through the approval process is time-consuming and complicated. You are also required to sit through an explanatory class.
Should You Apply For a Reverse Mortgage
Applying for a reverse mortgage has certain benefits, but it can also come with a few risks. You can pay off your current debt, leaving you with more cash each month.
Use the money to add a mixed-media room for family movie nights or fund a dream vacation.
The primary downside to a reverse mortgage is the loss of equity in your home. It’s something to think about, especially if your heirs will be responsible for paying off the loan.