If you are a homeowner and are facing retirement, you may wish to take advantage of the available equity in your home by going in for a reverse mortgage. A reverse mortgage, also known as a Home Equity Conversion Mortgage (HECM) is a relatively new product. If you are at least 62 years or older and have at least 50% equity in your home, you may be able to qualify for a reverse mortgage. By going in for this option, you may be able to borrow money against the equity in your home and receive cash in tax-free payments. This type of mortgage is different from other types of loans because repayment, including accrued interest, is not required until the homeowner passes away or decides to sell the home.

Reverse mortgages may seem attractive to you due to the fact that the lenders would consider neither your income nor your credit history in order to determine whether you qualify. The criteria for qualification that would most likely be considered by the lenders is your age, the value of your home and the amount of available equity in your home (generally you can expect that the lenders would insist that you have at least 50% equity in your home which means that any existing mortgage balances on your home cannot be more than half of your current property value). At the same time, you may also like to note that the eligibility for a reverse mortgage is set by the Federal Government. The Federal Housing Authority (FHA) tells HECM lenders how much they can lend you, based on your age and your home’s value. Yet, you may still like to research the reverse mortgage requirements in detail before taking your decision.

While a reverse mortgage can certainly come in handy in your retirement by providing you with extra income as well as financial security, it is advisable that you evaluate the pros and cons of going in for one before you take your decision. Some of the advantages of reverse mortgages can be as follows: First, interest rates on reverse mortgages can be quite lower than on traditional mortgages and hence this mortgage can be considerably cheaper than selling or moving to a new home. Second, a reverse mortgage can provide you with the flexibility of receiving a lump sum, monthly payments, or a line of credit. Third, you will never need to repay a reverse mortgage as long as you live in the home.

But reverse mortgages can also have a downside. The major disadvantage with a reverse mortgage is that by opting for one, your home equity would start eroding unless your home value is growing rapidly. Therefore, it is quite likely that you will have less equity available in your house when the lender actually sells the property. You would thus be using up part or all of an asset, which might otherwise be left to children or other heirs. Also, the fees on a reverse mortgage are generally higher than those on traditional mortgages and therefore, unless you wish to stay in your home for at least a few years, going in for a reverse mortgage may not seem like a worthwhile proposition to you.

There are certainly pros and cons of a reverse mortgage and as a prospective borrower you may first like to consider how you will use the proceeds and whether it makes sense to receive the cash over time or all at once, while also weighing in the disadvantages. You may also like to talk to your lender who should be able to guide you through all the available options and provide you with the necessary reverse mortgage tips. It is always advisable that before you take your decision, you evaluate all the pros and cons, consider all the available options and make the decision that’s best for you and your specific needs.

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Category: Finances
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