A Guide to Reverse Mortgages
A reverse mortgage is a mortgage loan that could be very beneficial to some but could be extremely detrimental to others. Understanding how reverse mortgages work and how they can do just as much harm as good if they aren’t used correctly is crucial for anyone considering applying for one.
What Is A Reverse Mortgage?
A reverse mortgage is a unique type of loan where the lender actually pays you. The payments, though, come from the equity of your home. When the borrower either moves to a new home or passes away the loan has to be repaid.
Can Anyone Get A Reverse Mortgage?
The short answer is no, not everyone can not get a reverse mortgage. To be able to apply for a reverse mortgage you must be at least 62 years old, you must have paid off all or at least most of your mortgage, and the property must be your primary residence. To be fair, these requirements are for the best for a couple of reasons. First, reverse mortgages are great for an elderly person who is retired and needs some sort of stable income but does want to sell their house. It would be a bad idea for anyone who has not paid off their mortgage to get a reverse mortgage, that would be delaying the inevitable pay off and with reverse mortgages, more interest is added to the balance you owe every month. So if you were able to have a reverse mortgage before paying off your regular mortgage, you’d end up paying more in the long run. When it comes to an older person trying to leave something for their children/heirs, most reverse mortgages have a “non-recourse” clause which means you can not owe more money than your home is worth. This way if you pass away and your children/heirs want to keep the house, they will not have to pay more than the appraised value for it.
Other things you need to know before applying for a reverse mortgage:
There are other fees that come with reverse mortgages. Lenders usually charge origination fees and other closing costs. Sometimes the lenders will even charge for servicing fees over the life of the mortgage and mortgage insurance premiums.
The interest rates are usually not fixed. Most reverse mortgages have variable interest rates which can cause the payments to fluctuate.
The interest is not tax deductible. Interest on reverse mortgages can not be deducted on income tax returns until the loan is fully or partially paid off.
You are still required to pay other costs related to your home. You keep the title to your home with a reverse mortgage so things like property taxes, insurance, utilities, fuel, maintenance, and other expenses all still have to be paid by you. If you don’t pay your property taxes, keep homeowner’s insurance, or maintain your home then the lender may need you to repay your loan.