As you head into your retirement years, you need to figure out how to generate income. Reversing your mortgage is one option that has become popular, but is also very controversial.
As the name suggest, this is a loan wherein you receive payments from a lender instead of making them. The rest of the loan, however, is much different than your run of the mill mortgage.
The reverse mortgage is based on the equity in your home. Every time the lender makes a payment to you, it gets a bit of your equity. This equity is held as debt like in a traditional mortgage and interest is charged on the amount.
A thought that may have popped into your mind is what ultimately happens when the equity in the home is used up? If there is no equity, do you still own the home? Are you expected to pay off the loan? Do you get evicted?
When the equity ran out, the very first reverse mortgages often had clauses that allowed the homeowners to be removed from the property. Yes, it was ugly. Most current programs allow you to remain in the home, but read the fine print of yours.
Considering you are giving away a big chunk of your nest egg, you should get some sizeable payments, right? Well, maybe. There are a lot of factors involved. These include the dollar value of your equity, your age and so on.
Finally, the biggest factor is the particular plan you choose. You will have a choice of different options that produce different payments and so on. The situation is similar to the one in which you decide upon a mortgage for a home you buy.
So, can you change your mind and go in a different direction? Yes. In doing so, however, you have to either sell your home to pay off the reverse mortgage or simply pay it off outright.
Real estate is beautiful because it appreciates most of the time. After getting a reverse mortgage, can you still tap this appreciation? The answer is usually yes, but you may have to refinance the property to do so.
So what happens when you reach the end of the line? In such a situation, the home is handled just like one with a traditional home loan. Your heirs will either sell it or come up with the money to pay off the reverse mortgage.
In some cases, the reverse mortgage makes sense. In others, it does not. The only way to make a determination is to discuss the details with a financial professional.