Professionals and Cons of a Reverse Mortgage
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There’s a lot of misinformation out there about reverse mortgages – and Tom Selleck can only answer so many questions in 30-second TV commercials for AAG. Reverse mortgages can be a lifeline for seniors experiencing financial difficulties, but they are not for everyone and come with risks and costs. Here’s what you need to know.
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With reverse mortgages, the lender pays you
Reverse mortgages are just another way for homeowners to develop their equity. Like home equity loans, HELOCs, and cash-out refinances, reverse mortgages are loans against equity – but they’re structured differently from the rest.
With regular mortgages, borrowers increase their home equity with every monthly payment they make to their lenders. As the name suggests, reverse mortgages do the opposite – the lender takes some of the equity in the home and converts it into payments to the borrower.
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The benefit of reverse mortgages
Reverse mortgages are available to homeowners aged 62 and over. With the payments from these specially structured loans, seniors can supplement their income, pay for health services and cover their expenses. Better still, the money is usually tax-free, although it is used as income. You retain ownership of your home and your Social Security and Medicare benefits are not affected. Perhaps most importantly for seniors who are concerned with safety, as long as you live in your home, you don’t have to pay back the money.
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And now for the disadvantages
If you sell your home or just move out, you will have to pay the money back. If you die first, your spouse or estate will pay for you, although in some cases a non-borrowing spouse can stay in the home. But even in these cases, the surviving spouse will no longer receive any payments because he did not receive a loan. In many cases, the home is the estate and the home must be sold in order to repay the reverse mortgage loan. This is bad news for all heirs who have been expecting an unexpected inheritance.
The story goes on
Other risks are:
You lose tax breaks: Interest paid on reverse mortgage loans is not tax deductible, even partially, as is the case with traditional mortgage rates.
The bill grows over time: With every reverse mortgage payment you accept, interest is added to your growing balance and the cumulative effect never stops for the life of the loan.
The loans can bring unpleasant surprises: Most reverse mortgages come with variable loans, which means that the amount you owe can change over time.
The cost of owning a home remains with you: You continue to bear the costs for property taxes, home insurance, maintenance, repairs and repairs.
Reverse mortgages can get expensive: As with most loans, reverse mortgages incur fees, including commitment fees, service fees, closing costs, and in some cases, mortgage insurance premiums.
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Keep in mind…
There are three different reverse mortgage options:
Single-purpose reverse mortgages are the cheapest – they are offered by state and local governments and nonprofits
Proprietary reverse mortgages are private loans
Home Equity Conversion Mortgages (HECMs) are insured by the federal government and come with fixed rate loans instead of ARM loans
Each of these three types of reverse mortgage loan has its own advantages and disadvantages. Before you sign on the dashed line, do some research.
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Last updated: June 29, 2021
This article originally appeared on GOBankingRates.com: Pros and Cons of a Reverse Mortgage