Is a reverse mortgage right for you?

Many people are looking into a reverse mortgage as a source of income later in life. This can be a fantastic way to pay for unforeseen medical expenses, help make life easier, or just get a little extra income coming in. While a reverse mortgage can be a great option for all of these circumstances, that doesn’t mean it is right for everybody. There are a lot of things to consider when it comes to a reverse mortgage. Just some of the factors include:

• Upfront Costs
• Your age
• The current interest rate
• The amount of equity in your home
• Specific loan terms

What is a reverse mortgage?

In simple terms, a reverse mortgage is taking out a loan on the equity in your home. It is different from a home equity line of credit in several ways, some of which can only be understood by looking at the actual numbers which can vary depending on how big your loan is, how the cash is distributed, and the interest rates. Some of the most noteworthy differences between a reverse mortgage and a home equity line of credit (HELOC) include the draw period (when and how long you can draw cash from the loan) and when the lender can “call” the loan. In the case of a reverse mortgage, calling the loan is typically limited to the death of the homeowner, if the homeowner chooses to sell the house, or in some cases and loans when the homeowner moves out of the house for 12 consecutive months. In the case of the HELOC, the loan may be called other times in which case the homeowner would be forced to sell the house if the loan cannot be paid off. The interest rates are generally higher for a reverse mortgage.

How does a reverse mortgage work?

When you take out a reverse mortgage, you are effectively getting a loan backed by your equity in the home. You can receive either monthly payments or a lump sum and depending on your choice this will effect the terms of the loan. The amount of the loan will grow over time as interest on the loan accrues and your monthly payments are added to the sum. In the event of the homeowners death and the loan is called, there are a couple things that can happen:

• The heirs can refinance the property under a standard mortgage.
• The property can be sold to pay off the reverse mortgage loan.
• If there is extra money left after the sale of the house and loan is paid off, the heirs receive the difference.
• If the proceeds from the sale of the house are not sufficient to pay off the loan, the bank absorbs the debt.

Whether or not a reverse mortgage is preferable to either a HELOC or re-adjusting other finances will depend highly upon the actual terms and overall situation. We highly recommend looking at all options, investments, and the exact numbers with a professional or family before making a final decision. Like many financial products and services out there, they only make sense when you actually crunch the numbers and prove it.