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A reverse mortgage, also called an equity-based loan or a home equity conversion mortgage (HECM), is a special type of loan for older homeowners that enables them to receive money from the value of their home. Instead of making payments like with a traditional mortgage, borrowers with a reverse mortgage get cash from their lender by granting the lender future ownership of the home. A reverse mortgage is not the same as a home-equity loan or line of credit, which are smaller loans where you only repay interest and never your principal. With those types of loans, you still have to repay them at some point, whereas with a reverse mortgage you no longer own your house and cannot sell it until you meet certain conditions (see below). Read on to learn more about how they work, if they’re right for you and which pros and cons they have.
What is the Difference Between a Reverse Mortgage and a Home Equity Loan?
The main difference between a reverse mortgage and a home equity loan is that the amount you can get with a reverse mortgage is based on your home’s value while with a home equity loan the amount is based on your income, credit and other factors. These loans have different interest rates, different interest calculations, and come with different repayment terms, too. A reverse mortgage is a lump sum given to you at the beginning of the loan, while a home equity loan is a series of installments. Home equity loans are not the same thing as a traditional mortgage, either. With mortgages, you have to pay off the amount you borrowed plus interest, plus any other costs associated with the loan. With home equity loans, you only have to pay back the interest. They are often offered by banks, credit unions or other financial institutions.
How Does a Reverse Mortgage Work?
A reverse mortgage is a loan where the borrower does not have to make regular payments on the principal. Instead, the lender will own your home after a specified number of years. The amount you can receive with a reverse mortgage depends on the value of your house and your age. The way a reverse mortgage works is that a special kind of lender gives you a lump sum based on the current value of your home. The money is an immediate cash infusion that you can use as you please. To get the money, though, you have to agree to give the lender the right to sell your home when you die or move out. You don’t have to make monthly payments on the money like you would with a regular loan. Instead, the reverse mortgage loan is considered repaid when you die or move out. The home is then sold to pay off the loan. You can, however, continue living in the house and pay property taxes, homeowners insurance, and maintenance fees.
Is a Reverse Mortgage Right for You?
If you’re struggling to make ends meet or have no source of income, a reverse mortgage is probably not for you. This type of loan does not require you to make any payments, but you will only receive the loan amount when you move out or die. When you take out a reverse mortgage, you are literally giving away your home in exchange for cash. If you’re in a financial bind, though, reverse mortgages can be a good way to leverage the equity in your home to receive money without having to make monthly payments. However, they come with some drawbacks. If you take out a reverse mortgage, you will eventually lose ownership of your home. You also have to pay property taxes and homeowner’s insurance. And the longer you stay in the home, the less the loan’s value will be once you do end up selling it.
Pros of Reverse Mortgages
Reverse mortgages can be a good way to get cash when you don’t have any other sources of income or if you have a high rate of interest on your credit cards. There are a few reasons why you might want to consider getting a reverse mortgage: – You want to live on a fixed income – One of the biggest pros of a reverse mortgage is you don’t have to make any payments. Instead, the lender takes your home as payment. – You want to pay off debt – With a reverse mortgage, you don’t have to make payments on your credit cards, so you can use the money to pay down debt. – You have equity in your home – If you have equity in your home and you don’t want to sell it, you can use it to get a reverse mortgage. – You want to make improvements to your home – A reverse mortgage can help you pay for home renovations or repairs. – You want to travel – With a reverse mortgage, you can get cash for a vacation with no out-of-pocket expenses. – You want to take care of your family – With a reverse mortgage, you can pay for your children’s education or other family members’ living expenses.
Cons of Reverse Mortgages
Reverse mortgages are a type of loan, so they come with all the same disadvantages as any other loan. You will have to pay interest on the money and you might end up paying more for the loan over the long term. You’ll also have to pay property taxes and homeowner’s insurance. In addition, you might lose your home if you don’t live there until you die. Plus, you have to be careful not to exceed the government-mandated loan limits. The amount of money you can get is based on the value of your home and your age. You also have to be at least 62 years old and own your home outright.
Should You Get a Reverse Mortgage?
If you’re thinking about getting a reverse mortgage, you should know that there are some serious drawbacks. Reverse mortgages have a reputation for being expensive and complicated. The process of getting approved requires extensive information and documentation, so it’s best to start the process early. The main advantage of reverse mortgages is that they provide a reliable stream of income over a long period of time without the need to make monthly payments. They are particularly useful in situations where the homeowner is close to the end of their life and could benefit from an assured flow of monthly income during the rest of their life.
Final Words: Will You Be Able to Retain ownership of your home with a reverse mortgage?
Reverse mortgages come with the risk of losing your home, but there are ways to mitigate that risk. The government created the Senior Citizens and Veterans Endorsement (SCVE) rule to protect people against foreclosure who took out reverse mortgages after August 3, 1992. The rule limits the amount a lender can take from the sale of your home if you default on the reverse mortgage. In 2019, lenders cannot take more than 39% of the sale proceeds from the sale of a single-family home for seniors who receive Social Security Disability Insurance (SSDI) or Social Security Supplemental Income (SSI) and veterans who receive non-service-connected disability compensation.
Reverse mortgages are a type of loan that lets you receive money now — without paying interest — by promising to repay the loan when you die or move out. They are often used as a source of retirement income, as they let you convert the equity in your home into cash. Reverse mortgages are often costly, though, and come with fees, low borrowing limits and high interest rates. So they should only be used as a last resort.