An increasing number of Americans, particularly those in the Baby Boom generation, are retiring without sufficient funds to live on. This is why reverse mortgages have gained in popularity in recent years. Reverse mortgages have become a hot topic, but they are not without controversy.
A reverse mortgage is essentially a loan that allows you to turn a portion of your home equity into cash. With a reverse mortgage you stop paying your monthly mortgage payment and get paid a portion of your loan instead. (You can also get the money as a lump sum or line of credit.) As long as you reside in your house you don’t have to pay the loan back.
For these reasons reverse mortgages have become particularly attractive to older Americans who own their homes but find themselves in a tight financial situation. However, reverse mortgages have come under fire for being predatory in nature. Understanding precisely what you are getting yourself into is essential when considering a reverse mortgage.
- You get money based on the value of your home and you stop making your mortgage payment. You can use the money for whatever you want.
- You maintain ownership of your property.
- It is a “non-recourse” loan. This means the debt cannot exceed the market value of the property. Your heirs can keep the house and settle/refinance the loan, or sell the house to settle the loan and keep the remaining money. If the house isn’t worth enough to cover the loan no debt will pass to them. The Federal Housing Administration covers it.
- If you’ve not paid off your mortgage the interest on the reverse mortgage loan compounds with the original interest and it can quickly balloon out of control.
- Unlike a traditional home equity loan, you are not making payments on the principle and interest. So although your heirs are not on the hook for the loan, compound interest, fees, and fluctuations in the market can increase the likelihood they will be unable to retain the home when you are gone.
- You must remain there and continue to pay property taxes, maintenance and insurance.
Reverse mortgages are a great and safe way to get financial relief in your autumn years, particularly if you have no one to pass your house to when you’re gone. However, they can become expensive when it comes time to settle the loan.
If you are 62 or older and you own a house, we suggest a free information kit from our advertising partner American Advisors Group. They are the industry leader and have been ranked number 1 in reverse mortgages for 2016. (Full disclosure, we partner with American Advisors Group and recieve a small referral fee if you give them your business.)