Reverse Home Mortgage as a Retirement Option
Information, Pros and Cons of Using Home Equity as Income
If governmental assistance, along with other means of retirement options from savings or pensions isn’t sufficient, a reverse mortgage is another option to supplement retirement income. Even though there can be some advantages, there are also disadvantages that should be considered. Before considering this as a retirement option, it’s important to first understand what a reverse mortgage is.
What is a Reverse Home Mortgage?
A reverse mortgage allows the homeowner to receive cash against the equity in their home. It is different from a home equity loan because it does not require the property holder to repay the loan. The lender recoups their principal and interest when the property is sold. If there is any equity left when the home is sold, after the lender recoups their principal and interest, the remainder goes to the homeowner or the inheritors.
Advantages of a Reverse Home Mortgage
A reverse home mortgage can be beneficial for seniors that need extra supplemental income for financial security. The cash payout is usually flexible and can be monthly installment payments, a lump sum amount or a combination of the two. Other advantages include:
- The homeowners can remain in the home until the home is sold or upon the death of the last remaining homeowner.
- Besides receiving monthly installment or a lump some, a line of credit can be established and cash can be taken against the line of credit as needed.
- Income taxes generally do not have to be paid against the cash received. There are however some income tax rules that must be followed and a tax accountant should be consulted.
Disadvantages of a Reverse Home Mortgage
The disadvantages should be carefully weight against the advantages. A reverse home mortgage isn’t for everyone. If extra income is not needed, a reverse mortgage is probably not beneficial. Some of the disadvantages include:
- Closing costs and fees can be high, in many cases even higher than a conventional loan.
- If the home is paid for, the lender essential becomes the owner of the home.
- If the homeowners default on property taxes or insurance payments, the loan could be in default and the paid out principal and interest may become due.
- A reverse mortgage creates a reverse equity situation; as the loan progresses, the equity decreases.
A reverse mortgage loan should be used as a last resort. If the homeowners are having financial difficulties, other options to supplement their income should be considered. If a reverse home mortgage is the only option, always use a reputable mortgage lender. Read the truth and lending statement thoroughly to ensure that there are no surprises.
Source:
hud.gov
© 2009 James Clausen
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