You’ve probably heard of a reverse mortgage, but many people do not fully understand what this term means. In essence, a reserve mortgage allows retirement-age individuals to convert some of their home’s equity into cash.
This can be a huge help for seniors who need additional funds to supplement their retirement income. However, a reverse mortgage is not something that should be adopted on a whim.
It’s an important decision because a reverse mortgage may not be the best option for everyone. If you’re contemplating a reverse mortgage, you will need to consider several factors before deciding.
So, let’s take a look at some of the most important factors you should take into consideration before getting (or not getting) a reverse mortgage.
3 Things to Consider with a Reverse Mortgage
A reverse mortgage can have a huge impact on your retirement, finances, quality of living, and even the assets that you pass on to your children and grandchildren. Here are 5 things to consider when deciding on a reverse mortgage:
Paying back a reverse mortgage
Like most things in life, a reverse mortgage isn’t free. At some point, the equity taken from your home will need to be paid back to the lender.
As long as you live in the home, you won’t need to make any payments toward the reverse mortgage. However, the payments will start as soon as you move out, even if the house isn’t sold yet.
Additionally, if you do not pay back the balance on a reverse mortgage before you die, this debt will get passed on to your children (or whoever inherits your home).
This could put unwanted strain on the inheritor’s finances. So, you will need to consider how and when you plan to pay back a reverse mortgage before getting one.
How much will you need?
The amount you can borrow from your mortgage will depend on the value of your property and an important metric known as the Principle Limit Factor or PLF.
Your lender will calculate your PLF based on your age and the anticipated interest rate of the loan. The higher your PLF, the more you can borrow.
Not only can amounts vary from person to person (and property to property), but they can also vary based on how you want to be paid.
Some people need a lump sum to cover medical costs or other expenses, while others prefer a steady monthly income to ensure stability over the course of their retirement. Your specific circumstances will determine how well a reverse mortgage fits your needs.
In addition to paying back the principal amount of your reverse mortgage (plus interest), you will also need to pay the cost of insurance. Reverse mortgage insurance protects the lender in the event that you are unable to pay back the principal loan. You will usually need to pay a small percentage of your home’s value upfront, plus ongoing monthly payments.
Like any loan, you will need to pay back more than you get. This means that a reverse mortgage is best for those who really need a steady income or quick cash.
If you’re not in need of cash, there’s really no reason to take on the additional debt of a reverse mortgage.
We hope you found these facts about reverse mortgages useful! Remember, a reverse mortgage is great for some and a burden for others. You will need to consider all of the factors above before deciding.