Reverse Mortgage explanation with Pros and Cons

Reverse mortgage lenders charge such as servicing fees, origination fees, and for some, mortgage insurance premiums.

What is Reverse Mortgage?

A reverse mortgage is an agreement in which a homeowner surrenders equity in their home in exchange for a steady payment to be made to them. For a regular mortgage, you make payments to a lender periodically but in a reverse mortgage, the lender pays you in exchange for the equity in your home which you give. So that when you move out or die, you or your spouse/estate has to repay the loan which was being paid to you periodically. Sometimes, you may even have to sell the house in order to repay the loan.

It is important to consider the fact that there usually other fees reverse mortgage lenders charge such as servicing fees, origination fees, and for some, mortgage insurance premiums. Although the tax is not deductible on it, interest rates may change over time as their interests are mostly tied to a financial index and therefore, change with the market.

There are both pros and cons to using this arrangement.

The advantages include the following:

  1. Immediate improvement of finances

Reverse mortgages come are beneficial to those who want to improve their finances without directly taking a loan. With this arrangement, you can stay in your home and de-stress your finances or even use it as a financial planning tool.

  1. Homeownership is retained

With a reverse mortgage, you cannot owe more than the value of your home at the time of loan repayment even if you have been paid more than the value of your home by the reverse mortgage lenders. Also, you do not have to make payments on the loan until you are leaving the home permanently nor can you lose your home for reason of non-payment.

  1. Flexible payment options

There are flexible payment options available, depending on the type of loan you decide to use. The loan may be paid to you in form of the lump sum, credit line, or annuity. However, regardless of which type you use, it is tax-free.

Some of the disadvantages include the following:

  1. High fees and interest

The initial fees paid for a reverse mortgage are quite high and the interest on a reverse mortgage equally accumulates. Because of this interest, the amount you get to pay pack on the loan gets higher over time.

  1. Complicated process

For many, the reverse mortgage is a complicated process. The idea of taking up loans and paying back when you no longer live in the house remains strange to many.

  1. Loss of Equity

Since your home equity is used, fewer assets are available for your heirs. You can still leave the home, but they have to repay the loan balance.

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Harish is the editor at howto Finance. Here we publish high quality trending news topics on Business, Finance, Loans and Credit-Cards etc. Our editorial includes worldwide topics.

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