We all know about the Home Loan. Don’t we? Reverse Mortgage is exactly the opposite of Home Loan. In a home loan, first, you take a large sum of money from the bank at the beginning of the home loan tenure to buy a house. At that point in time, the bank fully owns your house. Then you start paying EMI to the bank on a monthly basis. You pay the principal amount along with the interest. With time the stake in your house increases and that of banks decreases. When the loan amount is completely paid off you own the house. In the case of Reverse Mortgage at first, you completely own your house. Then the banks make a series of payments to you. With each payment your stake in the house decreases and that of banks increases. At the end of the tenure, the bank completely owns your house. In this article, we will see the pros and cons of a reverse mortgage.
Who Takes Reverse Mortgage?
Generally, Reverse Mortgage is done by the Elderly people who own a house but have very little savings in their account. Reverse Mortgage can be done by those who are above 62 years and own a house of which he or she is a permanent resident. Owning a house gives us social status. For that people put in their hard-earned money to buy a house and end up having a very little amount of money in their bank account. No one wants to sell their house and enjoy their life with money. In this case, Reverse Mortgage is an excellent option to enjoy your life and live in your own house with dignity.
- It is good for those elderly people whose children live in some other places and own a house of their own. So it is not a good idea for you to pass on your house to them when you are in the position of a cash crunch.
- It is good for those also, who haven’t saved for their future medical expenses and now need regular medical assistance.
How does Reverse Mortgage work?
You can take a reverse mortgage if you are above 62 years and you have a house of your own. By taking reverse mortgage policy you can use the money to pay off your debts and live in your own house till you die. A reverse mortgage pays you 60% of the value of your house. You can take the money in one payment or you can take a line of credit where you can withdraw the money when you want to. It totally depends upon you.
Now for the repayment, after your death, your heirs get a 6 months’ time to clear this loan. If they are not in a position to do so then the bank sells your home to get its investment back.
What Are Some Pros and Cons of Reverse Mortgage?
Every financial policy has its pros and cons. Reverse Mortgage is no exception. Now let us discuss the pros and cons of the reverse mortgage.
Pros of Reverse Mortgage
#1: Pay off Existing Loan and also receive cash:
Seniors often face a reduction in income when they retire. Monthly mortgage payments become a burden for them. So if you have sufficient home equity you can opt for a reverse mortgage to pay off your existing mortgage and even can receive cash from the property with this policy.
#2: No More Mortgage Payment:
You don’t have to make any mortgage payments after you get the reverse mortgage policy.
#3: Save for future Needs:
By clearing the existing mortgage the money that is leftover can be put in the bank for your future needs like medical expenses.
#4: No Moving out of the house:
According to a survey, people want to remain in their locality. In the case of older people, the percentage is higher. So rather than moving out you can reverse mortgage your property and enjoy living there till death.
#5: Not taxable:
The money that you receive from a reverse mortgage is not taxable as it a loan not an income.
Reverse Mortgage Cons
#1: Heir’s situation:
The heir inherits the home with a lien. The lien is needed to be paid off within 6 months.
#2: Closing Cost:
A reverse mortgage has a closing cost and there is a possibility that they can be higher than a traditional mortgage. So it is very important that you first compare lenders and get the best rate.
#3: Balance Grows:
The balance on the reverse mortgage grows over the period of time. The only way to avoid this is to make payments on the reverse mortgage.
#4: Spending all Money:
If you use all the money that you receive from the reverse mortgage and the balance grows when you become really old and sick the only way to get money is by selling your house. In that case, you may get very little money if your property rate increases. In case your property valuation decreases you won’t receive any money.
#5: About Other occupants:
If there are other occupants in your house like a relative or a friend they will be forced to move out in case you die. Because they have no right over your property. In that case, it is better to discuss this matter with a legal advisor before taking the policy.
#6: If you Move:
If you move to some other place for treatment for a long time there can be an issue in case of the reverse mortgage. According to the terms and conditions, you have to live in your house with sound health which is often not possible.
So to sum up this discussion it is advised that you consult with a financial advisor before you take up the reverse mortgage policy. It is a good policy if your heirs don’t depend on you and have a house of their own. If it’s not then there are other options for you like renting the house and moving into some other small place which you can afford. If you really want to go for it. Then some of the companies that offer Reverse Mortgage are Quontic Bank, AAG, etc.
If you find this article informative please share it with your friends. Feel free to ask any related questions in the comments box below.