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Like anything else, reverse mortgages have pros and cons. Before deciding whether or not to choose a reverse mortgage, it is important to consider what they do to determine whether or not they are the right choice.
What is a Reverse Mortgage?
A reverse mortgage is a special kind of mortgage, aimed at senior citizens aged 62 and older. The idea behind it is that instead of making payments on the mortgage, the homeowners can receive money either monthly or in a balloon payment from the equity in their home. The interest from the loan during the time when no payments are made is added as a lien on the property.
Reverse Mortgage Pros
The money homeowners receive is added to the total debt on the home and is not due for repayment until they move out of the home, sell the home, or pass away. The homeowners may continue to live in the home. Payments are still made to the homeowner regardless of the value of the home or the amount owed on the home. When the balance is due, it will never be more than the home is worth, so you cannot go upside down. Income and credit score has nothing to do with whether or not you qualify for this kind of loan, and the money received cannot be taxed. It can provide a nice financial padding for folks who are on a fixed income and need to deal with unexpected expenses.
Reverse Mortgage Cons
When the homeowners move out of or sell the home, or pass away, the full balance of the loan is due immediately. This may leave a difficult financial burden for the homeowners and their heirs to have to deal with. Since interest is added to the loan each month and compounded over years, these loans become very expensive. Depending on the interest rates, most if not all of the equity in the home is swallowed by the interest. Reverse loans cost more to originate than other loans. Since the loan is based in equity, homeowners risk leaving no inheritance. The homeowners remain responsible for insurance, taxes and repairs to the home. To repay the loan, the house must be sold. The income from all the equity in the home with the added fact that there is no mortgage to pay could disqualify seniors from government programs such as Medicare - programs they may need access to.
There are some situations where a reverse mortgage could be extremely beneficial to homeowners, but for most, the reverse mortgage pros and cons are clear cut. Many people think that while the reverse mortgage sounds like a good idea, there is too much risk for additional debt and hardship on their loved ones that it is not worth it. There are plenty of other ways to secure additional income to help get through hardship, ways that do not put a home at risk. Think long and hard before agreeing to enter a reverse mortgage.
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