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Pros and cons of a reverse mortgage

Pros and cons of a reverse mortgage

October 10, 2016
reverse mortgage
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If you’re a homeowner who is at least 62 years old and you’re looking to finance your retirement, then a reverse mortgage might just be exactly what you’re looking for. This little-known loan product allows you to convert your home equity into cash which you can use however you want. And the best part is you don’t need to repay your loan every month. But, no matter how great it sounds, you still have to remember that a reverse mortgage comes with both pros and cons.

Pros

Here are some of the advantages that a reverse mortgage offers:

  • You can choose how the cash is paid to you, either in a single lump sum, a line of credit, a regular monthly cash advance, or a combination of the three.
  • You don’t have to pay anything back as long as you live in your home.
  • There is no minimum income required in order to qualify.
  • In case you receive more payments than your home is worth, you won’t have to pay back more than the value of the home.
  • The cash advances are non-taxable.
  • You remain the owner of your home.
  • With a federally-insured Home Equity Conversion Mortgage, you can live in a nursing home for up to 12 months before the loan becomes due.
  • You and your heirs receive any equity left after the home is sold and the lender fees are paid.
  • The cash advances don’t affect your Social Security and Medicare benefits.

Cons

  • The disadvantages of reverse mortgages are:
  • You have to be at least 62 years old in order to qualify.
  • You have to go through mandatory mortgage counseling.
  • There are limits on how big a mortgage you can get.
  • You can’t deduct the interest until the loan is paid off.
  • Your debt increases over time.
  • If you fail to pay taxes, homeowner’s insurance or other expenses, the loan can become due.
  • Reverse mortgages reduce the equity in your home.
  • You may be charged monthly servicing fees.
  • Closing costs and loan origination fees can be expensive.
  • Most reverse mortgages are variable interest rate loans tied to short-term indexes.

The bottom line

Getting a mortgage, no matter the type, is one of the most important financial decisions you’ll ever make. That’s why it’s important to know everything there is to know about it, the pros as well as the cons.

Thomas Hookton

Thomas Hookton is a finance journalist, history buff and science fiction connoisseur. Hit him up via email.

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