A reverse mortgage is money you borrow based upon the amount of equity in your home. Under the right circumstances, you don’t pay it back until you no longer occupy the property, either because you move out or because you die.
In the latter case, the provider of the reverse mortgage (the lender) gains title to the home and sells it to collect on the reverse mortgage. Any excess proceeds from the sale are passed on to your heirs.
2 Ways a Reverse Mortgage Could be a Good Option
There are really only two ways a reverse mortgage may be a good option:
- You have no intentions of moving.
- You’re not leaving your home to anyone in your will.
As for the first way, this can be unpredictable. If your health deteriorates and you move to an assisted living facility, you’ll be responsible for repaying the reverse mortgage. If you’re just in need of short-term cash, a personal loan may be a far better option than giving up your house.
You can tap into a reverse mortgage through a single lump-sum payment, an annuity (which is paid out in one-time annual payments), a line of credit (where you can take out money as needed), or monthly payments, which is the route most seniors take.
You must be at least 62 years old and the most you can borrow is $625,000, although the actual amount depends on the home’s value, your age, and the current interest rates (lower interest rate and older age both help increase the amount you can borrow).
Reverse Mortgage Pros and Cons
There are several pros and cons when considering a reverse mortgage.
- You’ll receive monthly payments for as long as you own and live in the property. This means you’ll continue to get payments even if you live to be 110 (and if you do, please tell us your secret!) as long as you don’t sell or move out of the house.
- Most of time, you’ll have to pay high, front-loaded fees, including an origination fee.
- Usually, the interest rate on the loan is higher than those for regular mortgages, personal loans. or home equity loans. Every dollar spent on interest and fees eats away at the amount you receive.
- You can’t bequeath the house to heirs unless you first pay off the reverse mortgage. The lender receives the house when you die. Unless you have left money in your estate that pays off the reverse mortgage, your heirs don’t get the house unless they first pay off the mortgage.
- If you move out, the loan becomes due. If the property ceases to be your residence for a year, you are considered to have moved out. So if you need to relocate to a long-term-care facility, you can trigger the loan repayment clause. In effect, you are a prisoner in your own home.
- You still have to pay for home costs, such as taxes, HOA fees, utilities, insurance, etc. These costs soak up part of the payments you receive from the reverse mortgage.
- Typically, people who take reverse mortgages have no other sources of income besides Social Security. If you take a lump sum and then spend it all in the first few years, you are out of luck.
A Better Alternative
If you are thinking that the cons outweigh the pros, you are correct. A much better way to access quick cash is through a personal loan, such as the type offered at PersonalLoans.com.
Before treading into the dangerous waters of reverse mortgages, you owe it to yourself to contact them and see the better alternatives they provide.