By Marlon Powell, guest blogger
Reverse mortgages were initially launched in the year 1988. These loans are gaining more and more popularity, particularly among senior homeowners. As stated by a survey conducted by the AARP (American Association of Retired Persons), consumer consciousness is increasing and the average age for reverse mortgage borrowers has dropped from 76 to 73. Once the baby boomer generation attains 62 which is the age to qualify, the market for reverse mortgages is anticipated to grow significantly. In addition, the variety of products is also anticipated to increase to fulfill this demand.
According to the views of various finance professionals, a reverse mortgage loan mustn’t be the focus of a retirement plan. However, it is reasonable for some senior individuals. There are obviously pros and cons of reverse mortgages and it’s essential that you evaluate them watchfully before going for such a loan.
Whether you’re thinking about a reverse mortgage loan, giving suggestions to a family member or are keen to know more, the details given below can help you:
Pros of reverse mortgages
- The principal advantage of this kind of a loan is that you can take out a loan by utilizing the home equity and you don’t need to pay off the loan till the time you vacate your home. Rather than sending payments to a lender, you receive payments from a lender.
- If you have attained age 62, then you can qualify for a reverse mortgage. The amount you’re eligible to receive is dependent on your age, the amount of your home equity and obviously, the interest rate. The borrowing caps fixed by sellers and the location of your home are also important elements. If everything else remains the same, the higher your age when you obtain the loan, the higher will be the amount you can get.
- When you shift (whether you sell your home or retain it and lease it out) or if you expire, the loan has to be paid off. Nevertheless, the outstanding amount with interest wouldn’t surpass the value of your home. If any money remains when the value of your home grows quicker than the cost of the loan, you or your heirs can retain the difference.
- It is a flexible kind of a loan. You can receive the money as monthly payments, a one time payment, a line of credit or a blend of the three. Since the money you get is a loan and not income, it’s not taxable.
Cons of reverse mortgages - One of the most significant downsides of this loan is that it’s expensive. Origination fees and closing costs can amount to 8-10% of the loan limit. This is worth taking into consideration. It is equal to paying 8-10 points on a traditional mortgage. It’s so costly that it is only reasonable if you want to stay in your home for an extensive period.
- It is essential that you understand that in spite of the fact you don’t need to pay off the loan till the time you shift from your home, you’re still acquiring debt. If the value of your home grows adequately, (which happens on rare occasions) that growth can compensate a part or all of your loan costs. Regardless of how you take it, the debt along with interest is going up each month. In addition, you have the accountability of the recurring costs of insurance, upkeep and real estate taxes.
- One more probable disadvantage of this loan is family discord. If you have inheritors who hope to acquire the property, they might get disappointed to find that the lender possesses a considerable part or the entire home. You should make sure to discuss with your family members if you intend to obtain this loan. It is assumed that they would look for what is sensible for you in the end however it is always prudent to stay away from sudden unexpected events.
When it is a sensible option
A reverse mortgage can offer additional income for seniors with small amount of retirement savings who want to stay in their homes for a considerable period. It is also a feasible option for senior citizens who have very little cash and who might be compelled to quit their homes. A number of households have utilized these loans to offer home care for an aged parent.
If the advantages of this loan surpass the disadvantages in specific circumstances, there are some loan options. The fees and loan limits differ from one lender to another and must be explored comprehensively. Options that should be taken into consideration are Fannie Mae Homekeeper Mortgage and Federally Insured Home Equity Conversion Mortgage or HECM.
