Quite a few retirees consider taking out a reverse mortgage. While a reverse mortgage may be a dream come true and work well for some people, for others it may not. Whenever you’re making a big decision, it’s always best to outweigh the pros and cons. Is a reverse mortgage a bad idea? Let’s take a look at the pros and cons of reverse mortgages.
What is a Reverse Mortgage?
A reverse mortgage is a process of borrowing against the current value of your home in exchange for a line of credit or cash from a lending institution. Reverse mortgages typically do not require monthly payments. The loan is often repaid if you or an heir sells the home sometime later.
Now that we understand what it is, let’s get into the pros and cons of reverse mortgages:
- Helps secure retirement – Reverse mortgages are a great option to secure retirement. If retirees don’t have an exorbitant amount of cash savings but have equity within their homes, a reverse mortgage can give them access to cash that would otherwise be inaccessible.
- You don’t have to move – A reserve mortgage allows you to liquefy your asset without having to move. If you’re in need of cash but you have no interest in selling or downsizing, a reverse mortgage is a route you may want to take.
- You can pay off existing loans – You can use proceeds from your reverse mortgage to assist you in eliminating or decreasing existing loans.
Is a reverse mortgage a bad idea? The pros and cons of reverse mortgages will have different meanings to each individual. If you’re wondering what are the downsides of a reverse mortgage, take a look at the following information:
- Possible foreclosure – Before considering a reverse mortgage, you must ensure that you can comfortably afford your property taxes, homeowners insurance, HOA fees, and all other costs associated with owning your home. You must also ensure that you reside in your principal home for the majority of the year. If at any point these things don’t happen, you could default on the reverse mortgage and lose your home to foreclosure.
- Heirs could inherit less – When you pass away, heirs will be required to pay the full loan balance or 95% of the home’s appraised value. Reverse mortgages usually require your home to be sold to repay the debt, meaning your heirs will not be able to inherit your home or cash from the sale as an asset.
- They can be complicated – There are a lot of rules that you need to make sure you understand before signing off for a reverse mortgage.
Regardless of what the pros and cons of reverse mortgages are, it’s important to fully understand the terms and conditions. A reverse mortgage may be worth it to you if your home is increasing in value considerably, you plan to stay in your home for a long time, and you can cover the costs of your home. Cheers to a happy retirement!