By now, you have probably seen an ad for reverse mortgages. There are all kinds of commercials for them; some featuring big name celebrities as the pitchmen. A reverse mortgage allows you to borrow money based upon how much equity you have built up in your home over the years. Some folks are able to take out these kinds of loans and never make repayment until they no longer live in their homes, either because they pass away or move out. When someone passes away, the lender gets the home’s title and then sells the property to get their money back. Excess sales money are then given to the heirs.
Here are a couple of situations where a reverse mortgage might be a good choice:
The person taking the reverse mortgage does not plan on moving.
The person taking the reverse mortgage does not leave the home to anyone in their will.
If you think the first option applies to you, know that it is not always easy to predict. People get older and often have to move to assisted living facilities. This makes the person still responsible for the reverse mortgage. If short term cash is all that is needed, a smaller personal loan is probably much better than simply giving the house away.
Reverse mortgages can be given out via a one-time-lump-sum payment, via an annuity, lines of credit or even monthly payments. Most senior citizens opt to take the monthly payment route. This brings up an important point: You have to be at least 62 years old to take out a reverse mortgage. And the maximum amount that can be borrowed is $625,000. This amount will vary according to how much the house is worth, how old you are and the current interest rates. If the rates are lower and you are older, you are allowed to borrow more.
Good Things about Reverse Mortgages
- You get a monthly payment for as long as you live in your home. This means that you could get monthly payments for quite some time if you stay in good health and don’t sell your home.
The Bad Things about Reverse Mortgages
- There are often high origination fees that have to be paid up front.
- Interest rates are typically higher than for traditional mortgages or personal loans.
- The house cannot be left to an heir until the reverse mortgage is paid off. The lending company gets the house if you pass away, then they sell it.
- If you have to move out of the house, you are on the hook for the loan.
- You are still responsible for things, like taxes, utilities, insurance and other upkeep costs. You wind up paying some of these costs with the money you get from your reverse mortgage.
- Most people who get reverse mortgages have no other source of income, other than social security. If you get yours via a lump sum, and then spend it all in a year or two, you will be in a tough financial spot for the years to come.
Looking at this list of pros and cons, you can see that the cons are definitely more to think about than the pros. As such, you may want to spend a bit of time thinking about whether or not you should actually pull the trigger and get a reverse mortgage. Many times, people get these loans because of an impending expense. If that is the case, you would be much better off getting a personal loan, than being tied into the potential pitfalls of a reverse mortgage during your golden years.