Your primary residence is the largest single asset most Americans have. However, unlike CDs, stocks and other financial instruments, home equity generally isn't available to the homeowner unless he or she sells the house. For older Americans, who own their homes outright, a reverse mortgage is a way to tap into the value that's been building up for years without having to move away from the home you've created so many memories in.
What is a reverse mortgage?
A reverse mortgage is a loan available to homeowners aged 62 and older who own their homes or who have a substantially-larger amount of equity than they owe on their first mortgage. Instead of the homeowner paying the bank, with a reverse mortgage, the bank pays the homeowner. There are no restrictions on how this money can be used. The amount of the loan depends on the homeowner's age, the value of the home and the condition of the home. The homeowner is not required to pay back the loan. However, the loan is due upon the loan holder's death or when he or she moves out of the home.
Benefits of a reverse mortgage
There are a number of good reasons to take out a reverse mortgage.
1. Extra monthly income. The most compelling reason to take out a reverse mortgage is to boost your monthly income or to raise money to pay large, one-time expenses, such as medical bills without having to sell your home.
2. Ability to use your home equity without moving. You're not required to move from your home with a reverse mortgage. In fact, these types of loans are only valid when you remain in your home.
3. Perfect credit not required. Since a reverse mortgage loan is tied to the equity of your home, no credit check is required.
4. You retain ownership of your home. As long as you stay current on your homeowner's insurance and your property tax payments, you retain ownership of your home and can make remodeling and other decisions about the home without consulting the bank.
Why a reverse mortgage might not be right for you
As attractive as it may seem, a reverse mortgage is not right for every homeowner over age 62. Below are a couple of reasons to think twice about taking out such a loan.
1. You want to leave a family property to your heirs. If you live in a house that has sentimental value to your family, a reverse mortgage would make it necessary for your family to pay back the loan in order to keep the family home.
2. The fees can be high. You may not consider the fees on a reverse loan, since you are getting money rather than paying. However, as with any home loan, there are closing costs, fees and interest associated with a reverse mortgage. Make sure to shop around to find the best terms if you opt for such a loan.
While a reverse mortgage isn't the right choice for every American over age 62, this type of loan can help you pay your monthly expenses without having to move out of your home. Just make sure you understand all of the terms and fees before you sign a loan agreement.
For more information on home mortgages, contact a company like Commonfund Mortgage Corp.