What is a Reverse Mortgage?

What is a reverse mortgage and who would benefit most from it? With retirement for example, one of the biggest possible stressors is the income loss you may experience. A reverse mortgage could be a benefit to you. To find out, you have to assess the merits of the process. Weighing the advantages and disadvantages is a vital part of the process. In this post we are going to be looking at what exactly a reverse mortgage is, along with the pros and cons.

detached house with lights on

What is a Reverse Mortgage?

A reverse mortgage is a mortgage loan, usually secured by a residential property, that enables the borrower to access the unencumbered value of a property. These loans are typically promoted to older homeowners as they allow elders to access the home equity they have built up in their homes now, and defer payment of the loan until they die, sell, or move out of the home.

Caters to a Retiree

One clear advantage of a reverse loan is it is designed specifically to cater to a retiree. There are several safeguards in place to make it low-risk for you. For example, the lender requires you to maintain residency in and ownership of the home. A traditional home loan can force you out of your home, if you miss payments on your mortgage.

Limitations on Borrowing

One thing you need to understand about a reverse mortgage is it does have borrowing limitations. Of all of the advantages and disadvantages of a reverse loan that is not necessarily a bad disadvantage. However, you have to be prepared for it. Federal laws and other rules attached to a reverse loan require the use of an online program called a reverse mortgage calculator. The calculations are made using the online tool for speed and accuracy.

Since what you can borrow is based on your home value at the time of application, several things can affect that value. For example, the size and condition of your home both affect its value. So does its location. Having the online reverse mortgage calculator available to figure out exactly how much you can access is definitely an advantage.

A Reverse Mortgage Can Help Dig You Out

If you already have a traditional mortgage and feel buried under it, a reverse mortgage can help dig you out. Having a traditional loan does not preclude you from putting in an application for a reverse one. You can, and in fact must, use the reverse mortgage to repay what you owe and stop receiving those traditional mortgage bills. The rest of the remaining money is yours to use in your preferred manner on whatever expenses you have.

Strict Rules

A slight disadvantage of the reverse mortgage is it does not have many rules, but they are strict and can be somewhat limiting. For example, you are required to live in the home attached to the mortgage agreement. Moving out of it is not an option while the loan is active, unless you are prepared for the balance to immediately be owed back.

Another revers mortgage rule that is quite strict is you still own the home. That means all responsibilities relating to owning it are yours. Tax payments and other obligations must be met. Missing those payments or filing as bankrupt is grounds for dissolution of the loan agreement. If that happens, the balance is owed back almost right away.

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What a reverse mortgage boils down to is an opportunity to dig out of traditional loan debt, and possibly other debts you have. The merits of a reverse mortgage include no monthly bill to pay and fairly good home security. But downsides do exist, including paying a lot of interest in the long run. Consider all of those merits and potential downsides before you ever apply. Also, make sure you shop around to get the best interest rates on your new loan, if you do decide to apply for one. That is the best way to enter into the agreement with your eyes open and not be caught by any surprises.

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