It seems that we can’t turn on the television or radio without hearing an ad for a “reverse mortgage.” So what is a reverse mortgage exactly, and who can benefit from using one?
A reverse mortgage is a type of loan taken out against your home. With a reverse mortgage (as with a traditional mortgage) you are borrowing against your home equity which is the difference between your home’s market value and the amount you owe on your mortgage. The difference in a reverse mortgage is that you do not have to pay it back while you are alive. Instead, the loan is paid off after you pass away.
What Are Some of the Benefits of a Reverse Mortgage?
Reverse mortgages can be a fantastic tool, depending on your goals. They can provide additional income and improve your cash flow, particularly if you have already paid off your home. Here are some reasons to consider a reverse mortgage:
- They can help you maintain your financial independence by providing additional income;
- They can allow you to stay in your home until you die;
- For most people, the risk of default is low; and
- They are not taxed.
One of the best things about a reverse mortgage is that the amount paid back will not exceed your home’s value.
What Are Some of the Disadvantages of a Reverse Mortgage?
As with any financial tool, reverse mortgages are not for everyone or every situation. Before you decide to take out a reverse mortgage on your home, you should consider the following potential disadvantages:
- Interest costs are higher because you are making no payments;
- The amount paid back after your death will cut into the estate left for your family or heirs; and
- Because they are based on a formula, the amount you can borrow is lower than with traditional home equity loans.
Reverse mortgages can also be complicated and rather difficult to understand.
The bottom line is this: A reverse mortgage is one financial tool you can use to achieve your goals. However, before you commit to a large loan, you should make sure you understand all aspects of the loan. If you are not sure whether or not a reverse mortgage is right for you, talk with a trusted financial adviser or attorney.