Reverse mortgages are special mortgages for retirees. When they are given out by private lenders they are known as reverse loans or mortgages. When they are given out by government bureaus they are known as home equity conversion mortgages (HECMs). In either case, obtaining one can help you pad your retirement nest egg. However, understanding the pros and cons of reverse loans is essential before you fill out an application for one.
What Makes Reverse and Traditional Mortgages Different
The biggest difference between reverse and traditional mortgages is a reverse mortgage does not need to be paid back immediately. There is also no requirement to pay set minimum amounts back on a regular basis. In fact, if you apply for one through a reverse mortgage lender, the lender will pay you set amounts regularly until you borrow the most you are allowed to borrow, unless you make other arrangements. For example, you may opt to receive one large payment, instead.
Reverse Mortgages and Home Ownership
Among the biggest advantages of a reverse loan is continued secure home ownership. If you obtain a typical home loan, the lender will have the power to repossess the home when you miss payments. There is no such danger with a reverse loan. When you talk to a reverse mortgage lender, one of the terms you must agree to is to stay in your home for the duration of the loan. Only if you leave it will the full balance suddenly be owed back. Since there will be no required regular payments to miss, eviction will not be a constant looming concern.
Reverse Mortgage Agreements Are Difficult to Break
Another pro of getting a reverse mortgage is it is difficult to accidentally break the mortgage agreement. In other words, a reverse mortgage calculator will be used to determine how much you can borrow. Then you can borrow that money for any purposes you want without fear of foreclosure or accidental default. It is possible to default on such a reverse loan, but it isn’t easy. The most common way to do so is to opt to move out of your home. If you no longer live in it, you will have a very short amount of time to pay the remaining balance due. Otherwise, the home may be sold.
A Slight Borrowing Con of Reverse Mortgages
One slight con of getting a reverse mortgage is you cannot borrow as much as you might think. Reverse mortgage calculators will be used to plug statistics about your home and its value into a set calculation formula. That formula incorporates government regulations, which only allow a percentage of the value of the home to be borrowed. Once the amount you can borrow has been established, your reverse mortgage lender can set up the terms of your loan. Therefore, you cannot assume the total current worth of your home is the amount you can borrow.
Fees Associated with Reverse Mortgages
Another reverse mortgage con is the fees and closing costs of reverse mortgages can be a bit confusing. First, you must understand you will be charged closing costs and fees for signing the mortgage contract, as you would with a traditional home loan. The only difference in those fees are deducted from the total you can borrow at the start of the proceedings. Additionally, reverse mortgages do accumulate interest. Since they can take many years to pay off, that means you may wind up paying back much more than the initial amount borrowed.