One of the biggest fears many people have as they advance in years is making sure that they have enough money left over for their retirement. Though many people have worked hard to ensure the savings they need to enjoy their later years, sometimes the majority of their money from their life has been tied up entirely in the equity of their home, and other possessions. In these cases one of the best ways to unlock that equity is to investigate a reverse mortgage.
What is a Reverse Mortgage?
A reverse mortgage is a type of home loan that is available to those people who are aged sixty two and older. What this type of mortgage allows is to access and make available the equity tied up in the home in the form of an immediate loan which does not need to be repaid immediately; in fact the loan does not need to be repaid until the home owner sells and moves out of their home, or unfortunately passes away. This is in effect, agreeing to sell some, or all of your home to the bank, in order to unlock the value of the home much earlier, while maintaining a payment free place to live in the meantime.
A reverse mortgage is not dissimilar to that of a traditional mortgage. Instead of trading the value of recurring payments to the bank in order to get a home, in a reverse mortgage you are trading the value of the home in order to be paid up front in a lump sum, or in recurring payments. Like a in a traditional mortgage though, the value you are given does accrue interest, just like any other loan. You will be liable to pay that back at the termination of your agreement, either via sale or other terms.
Advantages of a Reverse Mortgage
- Unlocked Equity: Your home has value built up in it, you can use that value to enjoy a happier, fuller retirement.
- Secured Living Situation: You no longer need to worry about moving into an unfamiliar home and making payments. Now you can stay at home and only pay the property tax and insurance.
- Freedom to Choose: Reverse mortgages can be paid off at any point prior to the end term of your loan. Assuming the reverse mortgage is paid off early, you will still be the owner of your home, and it can be sold off or passed on within your estate.
Disadvantages of a Reverse Mortgage
- Reverse mortgages are often lent at a higher rate of interest.
- In case you don't repay your reverse mortgage early, you will lose the principal and interest of the loan, and it will not enter into your estate, meaning less to pass on.
- You still have to pay taxes and home insurance.
- You'll be liable to pay for appraisals and associated fees.
If you are considering a reverse mortgage, it is important to make sure that consult your family and any legal advisors that you may need. There are advantages and disadvantages, but often times using the freedom that a reverse mortgage can grant you outweighs the downsides.