If you own a property and are at least 62 years old, you can borrow from your equity to get cash or a line of credit from a lender. This type of loan is known as a reverse mortgage. Unlike a normal mortgage, you are not required to make monthly loan payments; you will repay the loan when you or your heirs sell the house. According to the IRS, the money you get from a reverse mortgage is considered a loan advance rather than income, meaning that the funds are not taxable, unlike other retirement income, such as distributions from a 401 (k) plan or an IRA. You may not have to make payments with a reverse mortgage, but there are still a lot of expenses associated with it.
Not only do you have to keep up with your taxes, insurance, and HOA rates, but you also have to pay an insurance premium in advance. This generally represents 2% of the appraised value of your home. You'll also pay origination fees when you close. You have the option to include these costs in your loan balance, but that means you get less money. We'll dive deeper into the pros and cons of a reverse mortgage and help you determine if it is right for you.
Your invested income is not taxable. The IRS doesn't consider invested mortgage payments as income, so they're not taxable regardless of whether you receive them as a lump sum, a monthly income, a line of credit, or any combination of the three. A major disadvantage of reverse mortgages is the loss of the home's net worth. Because you're not paying the balance of your reverse mortgage, you'll make less profit when you sell or you'll limit your borrowing power if you need a new loan. You may be disqualified from other income benefits.
Consult with a financial advisor or lawyer before deciding how to receive your funds. Why? Your eligibility for Supplemental Security Income (SSI) or Medicaid may be affected if you receive funds from a reverse loan. You could lose your home due to foreclosure. You are still responsible for paying property taxes and insurance, and if you don't pay your property taxes, you could lose your home to foreclosure. A reverse mortgage lender can foreclose your home if you don't live in it for more than 12 consecutive months due to health care problems. If you want to take out a home equity loan, don't be fooled into thinking that a reverse mortgage is your only option.
In fact, in recent years, reverse mortgages were sometimes the least popular method homeowners used to capitalize on their home equity. Instead, more people had opted for home equity lines of credit (HELOC), refinancing with cash withdrawals and home equity loans. However, each of these loans has its own requirements, loan limits, and monthly costs to consider. Here's a quick summary of how these types of loans compare to a reverse mortgage, but you can also check out our more comprehensive comparison between reverse mortgages, home equity loans, and HELOC for more information. Leveraging the accumulated value of your home can be a useful tool; however, it involves risks.
Understand the pros and cons of a home equity loan. If you watch television, you've probably seen well-known voices such as actor Tom Selleck who promote inverted mortgages as a valuable tool for anyone retiring. However, every financial product has two sides so carefully consider the pros and cons of a reverse mortgage. The fees associated with a reverse mortgage can be expensive including higher than average closing costs and a high opening fee. Fees may include private mortgage rates appraisal and title insurance.
Unlike a more standard loan product the expenses involved in this type of mortgage can be high enough to reduce the value of your home by one or more percentage points. When researching a reverse mortgage it's important to talk to your family and a trusted financial advisor to assess the advantages and disadvantages. While a reverse mortgage may not work for your situation don't lose hope that it's not your only option for generating cash or saving money. A reverse mortgage is paid when the borrower dies permanently moves out of the house or the property is sold. A reverse mortgage is a loan for homeowners aged 62 and older which allows them to apply for loans based on the equity of their homes. If you want to avoid this pitfall you'll need to look for a reverse mortgage product that doesn't have an adjustable rate which can be difficult to do. An advantage of cashback refinancing is that you'll build up capital over the term of your loan rather than continuously reducing it as you would with a reverse mortgage. A single-purpose reverse mortgage is a loan offered by some state and local government agencies and non-profit organizations. Homeowners of retirement age with health problems may consider a reverse mortgage to raise money for medical bills.
Even if your spouse wasn't a co-borrower of the loan you can stay in the home after your death or move to a long-term care facility if you were married when you applied for the reverse mortgage. If you need a major loan you might also want to look for a giant reverse mortgage although they're harder to come by. A giant reverse mortgage is a loan from a private lender for more money than allowed by the “maximum claim amount” set by the FHA for its HECM program. Here are some general rules that can help you evaluate if a reverse mortgage makes sense in your situation: The income from a reverse mortgage loan is usually tax-free and there's no need to repay any penny of the loan if the borrower stays in the home pays property taxes and property insurance and covers maintenance costs. Because of the many disadvantages of inverted mortgages be sure to explore all your lending alternatives to ensure that your finances don't end up in jeopardy.