What Is a Reverse Mortgage - And Is It a Good Idea?
A reverse mortgage is a type of loan where the bank makes available the value of the home’s equity. The homeowner can withdraw the principal of the mortgage in a lump sum, in monthly payments, as a revolving line of credit, or in a combination of these options.
With a conventional mortgage, the homeowner pays the lender on a monthly basis; once the mortgage has been paid, the homeowner owns the home. With a reverse mortgage, the homeowner does not have to make payments—although it’s possible to do that. The title of the property stays in the homeowners’ name—unlike with a conventional mortgage. It sounds good on the surface—but there are some drawbacks. These include:
Reverse mortgages are a loan—and they come with origination and other fees that can be quite high. Banks typically don’t decide the terms of your loan based on your credit score or income—only the equity of your house—and that results in some special risks for them. They’re likely to charge high fees at the start to make up for those risks.
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High interest rates
True, you can withdraw the equity on your home—but you might get less equity than you think. That’s because interest rates on the loan can be quite high, usually more than you’d have for an ordinary mortgage.
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You might not be able to leave the house to your heirs
You aren’t required to pay down your loan in a reverse mortgage—instead, you’re supposed to pay off the loan when you sell the house. If you own the home when you die, your heirs are supposed to sell it to pay the loan. They can sometimes keep the house if they pay off the balance of the reverse mortgage when you die; but that money comes out of the estate.
You’ll have to repay the loan with the proceeds from selling your house. A reverse mortgage basically gives you the proceeds from selling your house before you sell it. That means when you actually sell it, you owe that money to the bank.
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Sometimes you have to repay even if you don’t move out
If you don’t want to make payments on the loan, you have to live in the house as a primary residence. If you haven’t lived there for a year or more, you have to pay back the loan—even if the reason you haven’t lived there is that you’ve moved to a long-term care facility. There are some situations where homeowners are no longer able to stay in their homes for health reasons, but who haven’t died or sold the home—and the bill comes due.
You still have to pay regular homeownership costs
You may have a reverse mortgage, but you’re still responsible for regular maintenance, property taxes, insurance, and other costs of homeownership. This can be difficult, especially if you’re not living in the house—and you don’t have a reverse mortgage large enough to cover those costs.
Reverse mortgages might sound like a great deal, but the terms are often not as good as they seem. Be sure to read the fine print carefully before signing on for a reverse mortgage—and consider the drawbacks. A reverse mortgage might cause difficulties for your heirs down the road, or for you if you have to move out before you’re ready to sell. In addition, reverse mortgages can come with high fees and interest rates that make them more expensive than you’d expect. Be wary, and hopefully you’ll be able to find a good deal.