No one hesitates when taking out a regular mortgage – so why do reverse mortgages get such a bad reputation? In the right situation, the benefits of a reverse mortgage can highly outweigh the disadvantages. If you’re a retiree that wants to stay in your home, rent-free, as well as get your hands on some cash it could be a great idea. But, like any big financial decision, it pays to do your research first. Here, you can figure out the pros and cons and discover 5 things that you need to be aware of before taking a reverse mortgage.
The Pros of a Reverse Mortgage
A reverse mortgage gives you lots of flexibility, as you are ultimately receiving part of the money back that you used to pay for your house. By trading off home equity for cash, you can get money for a vacation, a new car or home improvements. You’ll have the choice of taking a lump sum, fixed monthly payments, a line of credit, or any combination of the three.
Using an online calculator, you can estimate how much money you’ll receive. To find out this figure, it’s as simple as inputting your zip code, age, home value and existing mortgage balance – if you have one.
This means that the total amount owed can never exceed the current value of the home. Once the home is sold, and the reverse mortgage paid off, the remaining proceeds go to you and your estate.
The Cons of a Reverse Mortgage
Sleazy Sales Tactics
If you’ve stumbled upon someone who is talking you into a reverse mortgage because they will financially benefit from it, don’t fall for it. This salesperson will earn a commission if you buy the financial product. So, they might use tricks to convince you it’s the right idea for you – even if could be potentially destructive.
Instead of trying to bargain with salespeople, talk to a financial advisor you trust. Home equity investments can be risky business and should only be used if you fully understand and can afford the consequences.
5 Things You Need to Consider Before Taking a Reverse Mortgage
1. Moving After Taking a Reverse Mortgage
Similar to a regular mortgage, there are origination fees and expenses you need to pay when taking a reverse mortgage. However, instead of paying upfront for these costs, the fees are added to the balance of the loan.
If you’re planning to move to a new house in the next 2-4 years, find a less expensive way to borrow money before settling on a reverse mortgage.
2. Keeping the Home in the Family
Once you die (or the second person to die if you are married) the reverse mortgage will need to be repaid. If there isn’t enough cash in your estate to pay off the debt, then your heirs may need to sell off the property to pay the loan.
If you want to keep your home in the family, make sure your heirs are fully equipped to pay off the loan otherwise your house may slip through their fingers. Look after yourself first though. Keeping your home in your family might be nice, but if a reverse mortgage will give you the money you need to live comfortably then it might be what you need to do.
3. Status of the Real Estate Market
The amount of money you will receive from a reverse mortgage depends on your age and the appraised value of your home. If the market is in a slump when you decide to take a reverse mortgage, you won’t be able to get the best deal.
However, if you take a reverse mortgage when the marketing is booming, then you later decide to sell your home in a down market you may not have much equity left.
4. Ownership Responsibilities
As the owner of the property, it will still be your responsibility to pay taxes and insurance. Alongside costs to keep your home well maintained. It works the same as any other mortgage – if you don’t pay your taxes you’ll be in trouble.
5. Eligibility for Medicaid
All proceeds you receive from a reverse mortgage are tax-free. However, the funds you receive will count as income or an asset that may affect your eligibility for Medicaid. But, your proceeds won’t affect Social Security or Medicare benefits.