You may have seen the advertisements recently telling you that you are sitting on a pile of cash in the form of your house.
They aren’t telling you to sell your house. Instead, they are suggesting you think about trying a reverse mortgage.
There is a growing trend among homeowners to use reverse mortgages (also known as a lifetime mortgage) to gain extra money in a time of crisis.
Here is my simple guide to the pros and cons of a reverse mortgage:
Money is released to you in a lump sum or allowance, which can be paid out to the applicant(s) on the documents.
If a spouse or partner dies, the money will still be paid out to the surviving partner until they pass away or move out to assisted living.
This means you can be sure your partner will be receiving some money even if you aren’t there to help them provide for the family.
Money doesn’t have to be repaid until the last applicant of the reverse mortgage is dead or moving into assisted living/care.
This means the brunt of the payment doesn’t fall to them and those who need to repay the sum are usually helped out by the person’s life insurance payment or money designated in the will.
Selling the house and using the profits is also a way of paying it back.
You may end up not having to worry too much about the amount you pay back – the shorter the amount of time you do it for, the less debt there is.
Your house may grow in value, meaning you don’t need to find as much money to pay the loan back. You can simply deduct the amount needed from your sale price.
“Weigh the pros and cons for
both you and your partner.”
You may also want to look at how much interest you will be paying. It may not seem like much to begin with, but the total will continue to mount as it rolls.
You don’t want to leave an elderly or infirm partner or your next of kin with a large amount of debt to worry about.
While you may find some house prices will grow over the years, your house may be in an area where the value drops.
If this is the case and you were planning to sell your house fast for market value to pay off your reverse mortgage, you may find the total of the reverse mortgage (if you have had one for a longer length of time) swallows most if not all of the money from the sale of the house.
This could leave you or those dealing with your estate scrabbling around for extra cash.
Though a fixed rate reverse mortgage means there will not be any interest added on to the original sum of money borrowed, the repayment fee will still be a fair amount higher than the original total you borrowed.
It would pay to weigh up these pros and cons for both you and your partner.
Though a reverse mortgage may seem like a good idea, it would be wise to investigate your house for its current cost on the market and what predictions are for the future, as well as using some of the money you will be receiving from the reverse mortgage in an ISA or life insurance policy to help with any future repayments.
Photo source: houselogic.com