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What is a Reverse Morgage? If you have a normal mortgage, you’re making monthly payments to a lender. But with a reverse mortgage, the lender pays you. For many people, a reverse mortgage can be a very appealing source of retirement income. But there are drawbacks as well as benefits.
Here’s an overview of the Pros and
Cons of a Reverse Mortgage:
PROS of a Reverse Mortgage
A reverse mortgage allows you to cash in on your home
to get a new revenue stream—one that can make your retirement much
more comfortable. A reverse mortgage lets you borrow money against
the equity of your home without losing ownership—so you can’t lose
your home if you can’t pay the loan.
In fact, you don’t have to pay the loan back at all until you die, or until you move out of your home. This means the loan is either paid for through the money you leave behind or through the proceeds you get when you sell the home. This can make the debt burden feel much lighter for retirees.
You do have to be at least 62 to qualify for a reverse mortgage. But there are no income restrictions, and the income is tax-free.
CONS of a Reverse Mortgage
Every time the bank pays you for your reverse mortgage, your home’s equity shrinks. This could have consequences if you need to get another type of loan based on the value of your home. In addition, reverse mortgages can be expensive. Fines can be high, and some banks demand up front payments of as much as 10% of your home.
If you stay in your home for the rest of your life, it won’t be you who repays the loan—it will be your heirs. This can be a drawback for seniors concerned about their estate and their financial legacy to surviving family members. However, your estate will never have to pay back more than the home’s appraised value.
Generally, if you plan on moving in the next few years or you only need to borrow a small amount, a reverse mortgage is probably the most cost-effective option. Some banks adopt aggressive sales tactics to get homeowners into reverse mortgage situations that are not in their own best interests. Be sure to talk to an independent financial advisor before signing any paperwork—and do some research to make sure you’re making the right choice.
As you can see there are some pros and cons to getting a reverse mortgage so make sure a reverse mortgage is right for you.
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