We hear a lot about reverse mortgages today, but in spite of that, there’s still a great deal of confusion surrounding them. In simplest terms, a reverse mortgage is a type of home equity loan for homeowners 62 years old or older that does not require the borrow to submit monthly payments. Once considered a kind of last-resort source of money, reverse mortgages have now expanded their uses. So what exactly is a reverse mortgage is, and how it can help Boston homeowners.
What Is a Reverse Mortgage?
A reverse mortgage is just a specialized kind of home equity loan available to homeowners 62 years old or older. If the homeowner has substantial equity in her home, she can borrow against it to get money in a lump sum, in monthly payments, or as a line of credit. And unlike a conventional “forward” mortgage, a reverse mortgage doesn’t require the homeowner to make loan payments.
With a reverse mortgage, the entire loan balance comes due and payable when the borrower dies, sells the home, or moves. The mortgage cannot, as per federal regulations, be structured to exceed the home’s value. That way, the borrower’s estate won’t have to make up any difference even if the home’s value decreases due to market fluctuations.
Most people who sign for a reverse mortgage do so to get needed cash (often for living expenses, home upkeep, and medical bills) when most of their net worth is tied up in the home. Reverse mortgages can help Boston homeowners, but call for careful consideration because they can be both costly and complex, and are subject to scams.
How It Works
Unlike with a traditional mortgage, with a reverse mortgage you don’t make payments to the lender – the lender makes payments to you. You also get to choose how you will receive the payments, and interest is rolled into the loan balance so that it’s not an unexpected expense. You also keep the title to your home. But unlike a traditional mortgage, over the life of the loan, your debt increases and the equity decreases.
Your home’s equity is the collateral that secures the loan. It’s just that you, as the borrower, never have to pay anything because nothing comes due until you pass away (in most cases, if you continue to live in the home). At that point, your home will be sold, and the proceeds will go directly to the lender to pay off the principal, interest, insurance, and fees. Occasionally, heirs instead opt to pay off the mortgage so that they can keep the home.
How a Reverse Mortgage Can Help Boston Homeowners
A reverse mortgage can help Boston homeowners in several ways, including providing:
- A means to access home equity without having to sell your home
- A way to access home equity for homeowners who can’t qualify for a home equity loan
- A way to have a large lump sum of cash or line of credit when needed
- A loan that requires no monthly payments
- A method to maintain cash flow when all your assets are tied up in your home
- Non-taxable income, because the IRS considers a reverse mortgage a loan advance
But Consider Carefully…
Despite these many obvious benefits of a reverse mortgage, there are definite pitfalls and drawbacks that you must take into account. For example, you will spend a large part of your accumulated home equity on interest and loan fees, which can accelerate quickly. And you will most likely not be able to pass your home on to your heirs because much of the equity will have been depleted. You should consult with both financial and real estate professionals to determine whether a reverse mortgage is right for you as a Boston homeowner.
To find out more about a reverse mortgage for your situation, contact us at NextHome Titletown Real Estate today! (617) 657-9811
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