You may have seen something referred to as a reverse mortgage advertised on television as a good way to fund your retirement. However, despite the amount of marketing that reverse mortgages receive, many people are still unclear on what they actually are. Below are a few things seniors should know when considering a reverse mortgage.
What Is a Reverse Mortgage?
A reverse mortgage is different from a regular home loan you would receive from a mortgage lender. Instead of borrowing money to purchase a home that you have to pay back over time in the form of mortgage payments, the homeowner uses the equity that has been built up over the course of the mortgage as a form of income. Equity refers to the difference that exists between the value of the home and the amount the homeowner has paid for it via mortgage payments. In this case, the home is used as collateral for the loan.
How Does a Reverse Mortgage Work?
With a traditional mortgage, equity is built overtime as the loan is paid off. With a reverse mortgage, however, the balance owed on the home actually grows. So instead of paying money, the homeowner receives it instead. According to a home loan mortgage company in Houston, this money is received as either a fixed monthly payment, or a line of credit that is made available to the homeowner. How much you get might depend on the mortgage interest rates in Houston or your local area.
One of the best things about reverse mortgages is that the home does not need to given over to lender until after the homeowner dies. During that period of time, the homeowner will continue receiving fixed monthly payments and will be allowed to continue living within the home.
What Are the Downsides of a Reverse Mortgage?
There are also a few downsides to obtaining a reverse mortgage any senior should seriously consider before deciding to obtain one from a lender. First of all, setting up a reverse mortgage will prevent you from handing the home over to an heir after you pass away. You should absolutely make sure your spouse is included in the contract for the reverse mortgage, and will be allowed to live in the home after you die. If you want to give the home to children, you won’t be able to with a reverse mortgage.
What Is a Reverse Mortgage Best Used For?
Reverse mortgages are best used as a form of retirement income for older seniors. It is probably not the best idea to use a reverse mortgage to pay for onetime expenses such as a vacation or home remodeling project, due to the fact you are trading the value of your home for that money.
Reverse mortgages can be great for seniors in certain situations. It may not be optimal for everyone however. Read up on the subject and discuss it with a financial adviser before making your decision.