When you retire, you need to still feel financially secure. That can be difficult, since your income is likely to be far less than you are used to. Converting some of your home equity to cash can help you solve that problem. However, a traditional home loan may not be the right option. A reverse mortgage is an alternative to consider, if you are over 61 years old. It is a different type of home loan meant to provide retirement relief with minimal risk.
Traditional Versus Reverse Mortgage Repayment Terms
One of the biggest reverse mortgage benefits is the difference in repayment terms. You have to start paying a traditional mortgage off almost as soon as you collect the funds. You pay it in small bits and must do so by specific predetermined dates. Missing your mortgage payments can result in defaulting on your loan and losing your home.
A reverse mortgage has completely different repayment terms that are essentially set by you. You do not pay anything early on. You also do not have to fully repay the loan balance by a particular date. Instead, the length of the loan is determined by how long you opt to live in your home.
Homes That Are Eligible for a Reverse Mortgage
In addition to your age, there are some other qualifying requirements to meet to obtain a reverse mortgage. One is that your home itself must be eligible for such a mortgage. For instance, to get a home reverse mortgage, the home must be your permanent residence. You cannot request such a mortgage on a property you own but do not live on.
You may be wondering if you can take out a mortgage on an apartment or multi-family home you own. The answer may be yes, if you live in one of the units in question. However, you cannot mortgage an apartment building you own when you live elsewhere. The building also must usually not have more than a few units in order to qualify.
Closing Costs and Other Potentially Hidden Loan Expenses
Another thing to know about reverse mortgages is they are a lot like traditional loans in one sense. That is there are fees associated with them. You do have to pay closing costs, for example. However, those are not paid out of pocket. Instead, they are deducted before any reverse mortgage funds are issued to you.
Until fairly recently, a hefty fee was charged for paying off a reverse mortgage too early. Laws have since been changed, so such a fee no longer exists. However, some lenders still charge processing fees in such instances. Therefore, you should make sure the long-term nature of a reverse mortgage is what you want before you sign an agreement to avoid unnecessary hassles.
Why You Must Consider Reverse Mortgage Interest Carefully
Another reverse mortgage fee you may not consider at first when you really should is interest. A traditional loan accumulates interest, but it only does so for a few years because the loan only lasts for a short time. Paying off a reverse mortgage is a much lengthier process, meaning much more interest accumulates by the time the loan is paid.
Making the Final Reverse Mortgage Assessment
When making the final assessment to determine if a reverse mortgage is right for you, think about all the factors carefully. Also, understand that those factors listed above do not cover all aspects of reverse mortgages. For example, if you apply for one you cannot move out of your home until it is paid. Therefore, it might hinder any future plan you may have to move to a different area. But, if you are planning to remain in your home as you enjoy retirement, it may be the perfect financial solution for you.