Retirement typically means accepting a reduction in income, but if you own your own home you may have another option. You can tap into your home equity and spend it, and not just by taking out a traditional mortgage. If you are 62 or older, you may be eligible for a reverse mortgage. Also known as a home equity conversion mortgage (HECM) when offered by a government agency, it is a unique type of loan that can relieve financial worries, rather than giving you another bill to pay. Here is what you need to know about reaping the benefits of a reverse mortgage to help you enjoy your retirement more while limiting the drawbacks.
Why a Reverse Mortgage is More Helpful Than a Typical Mortgage
A reverse mortgage is more helpful than a typical mortgage because it is a loan that offer you, the borrower, long-term repayment flexibility. The loan is issued by a reverse mortgage lender in such a way that you receive ongoing payments with no scheduled mortgage bill to pay. Instead, your reverse mortgage lender lets you take as long as you want to pay the loan back, as long as you continue using the home as your main residence. If you leave, you are given a short time to repay the entire balance. Otherwise, the home is sold with proceeds going to the lender to cover as much of the balance as possible. Remaining proceeds, if any, are given to you or your family. If the proceeds do not pay off the balance owed, anything that remains is forgiven without your other assets being touched.
Determining How Much of a Benefit You Can Receive From Your Reverse Mortgage
Determining how much of a benefit you can receive from your reverse mortgage can be a bit tricky. The age and condition of your home have to be taken into consideration, as well as the neighborhood it is in. There are also government regulations forbidding the full home value from being borrowed. The best way to get an exact determination of how much you can borrow is by using a reverse mortgage calculator . The purpose of the reverse mortgage calculator tool is to take all factors into account and let you and your lender know exactly what funds are available to borrow.
Preparing for Unexpected Reverse Mortgage Fees
A reverse mortgage offers you almost complete financial freedom in terms of how you borrow and spend the money, as well as when you have to pay it back. However, there can be some complications if you do not understand the unexpected fees that may arise. For example, a reverse mortgage has closing costs just like a standard home loan. The difference is you do not pay them after the fact. Instead, they are immediately deducted from the total you can borrow. Additionally, a reverse mortgage can accumulate a lot of interest because the duration of the loan is determined by how long you continue living in the home. Therefore, if you want to give your home to a loved one when you leave it instead of allowing the sale of the home, you must be prepared to pay the interest.
Reverse Mortgage Home Maintenance Responsibilities
A major benefit of a reverse mortgage is you cannot be evicted from your home if you miss a loan payment because the loan payments do not follow a set schedule. However, even though you will not have the traditional eviction worry, home maintenance responsibilities will still remain in your hands for the duration of the loan because you will still retain home ownership. Therefore, you can lose your home of you fail to pay necessary expenses like taxes. That is why your lender may require you to pass a credit check to ensure your financial stability.