Reverse mortgages are an excellent financial tool when used properly, but they are only applicable to certain situations. With a reverse mortgage, the homeowner receives either a lump sum or installment loan based on the value of their property. The lending institution then places a lien on the property, and ownership of the property transitions to the lending institution once the homeowner leaves the property.
1. The Homeowner Must Be a Certain Age to Qualify
Reverse mortgages are a highly regulated industry, and only those who are over 62 can apply for a reverse mortgage. Reverse mortgages are usually used to give someone who is already retired enough money to live on and a roof over their head.
2. The Reverse Mortgage Can Be Paid In Different Ways
Reverse mortgages allow many options for payments. The homeowner can decide to receive a lump sum, monthly installments, or even to use the reverse mortgage as a credit line. Different homeowners may prefer different payment solutions, and larger amounts of money are sometimes available depending on the type of solution that the homeowner prefers. In general, monthly installment payments will eventually offer the homeowner more money than a lump sum payment, but a lump sum payment will allow the homeowner to reinvest the money.
3. Loan Amounts Are Based On Property Value
When a reverse mortgage amount is calculated, the reverse mortgage company uses the property value and then subtracts their fees, similar to how a real estate agent would take a commission or a mortgage company would charge loan initiation fees. While a homeowner may not receive as much money through a reverse mortgage as through a direct sale, they do receive the very large benefit of not having to find another home to rent.
4. Homeowners Do Not Have To Vacate
One of the most important aspects of reverse mortgages is that the owner does not have to ever vacate the property until they chose to do so. This means that the homeowner gets all the positive aspects of selling their home without any of the negative aspects.
5. Reverse Mortgages Don’t Count As Income
One thing that many homeowners mistakenly assume is that a reverse mortgage will count as income once tax season rolls around. Because a reverse mortgage is actually considered a loan, no income taxes need to be paid upon it. The loan will be paid off once the property is acquired by the loan company and no real profit will be made by the homeowner. This means that all the money that is received from the reverse mortgage can go to the homeowner’s expenses.
Reverse mortgages are most often used if a retiree needs extra income to keep their existing lifestyle but also does not wish to lose their home. For retirees that already have another place to live, it may be a better financial decision to sell the property outright and then move. Everyone’s financial situation is different, so all options should be considered when making such an important decision.