The Real Truth About Reverse Mortgages
As you near retirement, there is no doubt that money becomes a huge concern. Before you make the final decision there are a number of decisions that you are going to be faced with. Will you have enough to live on? How long will your investments last? Can you stay in your own home?
This last one is big for many people looking to retire because even if you own your home, staying put can be an expensive proposition. That’s one reason why reverse mortgages have become increasingly popular recently.
What Is a Reverse Mortgage?
Basically a reverse mortgage is a loan. But in this case, the homeowner converts some of their home’s equity into cash. This cash can take the form of a monthly payment, a lump sum, or be put into a credit line account.
Although there are 3 different types of reverse mortgages, the most common is the Home Equity Conversion Mortgage (HECM).
To be eligible for an HECM, you must be at least 62 years of age and you must use the home you are borrowing against as your primary residence.
How much cash you’ll receive will depend on a number of factors, including the location and the value of your home as well as your age when you set the mortgage up.
Reverse mortgages are designed for those who own their own homes outright, as well as for those who have a large amount of equity built up in their homes. (You will need to pay off whatever balance is owing on your mortgage with part of the proceeds.)
Advantages of a Reverse Mortgage
There are several advantages to taking out a reverse mortgage.
It seems to be a win-win situation as you get to use the equity you’ve built up in your home without actually having to sell up. And then there’s the fact that the loan does not have to be repaid until the homeowner dies or moves, or until the house is sold. Finally, you won’t risk losing your Medicare or Social Security benefits.
It can come in handy for seniors who are cash-strapped. That extra tax-free money can come in awfully handy when it comes time to pay unexpected bills, make home repairs, cover medical expenses or just enjoy a few extras.
Disadvantages of a Reverse Mortgage
But before you rush down to your local bank, be aware that it’s not all good news when it comes to reverse mortgages. As much as lenders try to dress-up the picture, when you take out this type of mortgage, you are taking on a very expensive kind of debt.
And that is one of the very significant drawbacks when it comes to a reverse mortgage.
Let’s take a closer look at this and other drawbacks so you can make an informed decision.
Yes, lenders are limited as to the rate of interest that they can charge, but since with a reverse mortgage you aren’t going to be making payments, interest starts accruing as soon as the loan is taken out and continues to do so for the life of the loan. In a worst-case scenario, it’s possible that the total debt could turn out to be more than the value of the home.
Setting up a reverse mortgage is more expensive than a standard mortgage and you as the homeowner pay these costs. These include the standard costs associated with setting up any mortgage, a monthly mortgage insurance premium which ensures that the lender doesn’t lose money if your home sells for less than the amount of the loan, and a monthly mortgage insurance servicing fee.
One dirty little secret is that you are required to take out a loan for the maximum amount that you qualify for, even if you don’t want or need that much. This means that you may be paying interest needlessly.
Aside from the actual loan debt, one thing that is often overlooked is the fact that you are still responsible for home maintenance costs, house insurance and property taxes. Even though you’ve essentially signed over ownership of your home to a lender, you are still on the hook for these costs. Defaulting on any of these could result in foreclosure.
Another potential problem that is not always thought through is the fact that if you, the homeowner needs to move out of the home and into a care facility, the mortgage loan becomes due.
Can you afford to pay off the mortgage and still pay for assisted living or nursing home care in a decent place?
And what about other family members who still live in the house?
Sadly, even a non-borrowing spouse, adult children or grandchildren can be forced to move out of the house, once that house is no longer the borrower’s principal residence.
The Verdict on Reverse Mortgages
As you can see, the disadvantages surely seem to outweigh the advantages when it comes to reverse mortgages. In short, taking out a reverse mortgage is a very bad way to raise money.
If you are in need of more money to finance your retirement, there is a much better way to do that (and it doesn’t involve going out and getting a part-time job). There are only so many jobs out there anyway, and if you’re looking to retire, do you really want to keep working for someone else?
More and more people today are discovering how to earn extra money right from home. You can be one of those people. It’s just a question of finding the right thing. But with so many different opportunities out there, chances are good that you’ll find something that you enjoy doing, while putting a few extra dollars in your pocket.
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I’d be willing to bet that you have knowledge and experiences that would be valuable to other people.
I’ve written a Special Report on various alternative ways to make extra income to help make ends meet in your retirement life.
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