If you own a home, you know that there are more mortgage options than just the basic 30 year fixed. One of these products is a reverse mortgage, and here's a quick look at it.
An Overview of Reverse Mortgages
When a lender gives you a lump sum of cash to buy real estate, this is a typical mortgage. In exchange, you agree to pay back the mortgage every month for a certain amount of time at a certain interest rate. The amount of the monthly payment depends on how long it takes to pay off the loan and whether the interest rate is fixed or changes over time.
A reverse mortgage works the same way, but in the other direction. The baby boomer generation is moving into their retirement years, which is a fact. A large number of them own homes with a lot of equity in them. Equity is a fixed asset, which means that you can't see it in your bank account. In the past, selling the property and moving to a cheaper place was the best way to turn this hard asset into cash. The difference was turned into cash, which you kept.
But many people have strong feelings about their homes. You may have spent a lot of your life in your home, including raising a family there, so it can be hard to sell it. On top of that, you may have to pay taxes on the money you get. When you think about how hard it would be to move all of the things you've collected over the past 15 or 30 years, selling your home starts to look like a bad idea at best.
Since lenders are the most capitalist people in the world, they have come up with a way to solve this problem. The mortgage that pays you. With a reverse mortgage, you can turn a large portion of your home's equity into tax-free cash without having to make monthly payments. You don't have to sell the house, move, or make monthly payments to a lender.
The way a reversed mortgage is paid for gives it its name. In a traditional home loan, the lender makes payments to YOU. In a reverse mortgage, the lender makes payments to YOU. You can choose to get the money in a lump sum, as a monthly payment for the rest of your life, or as a credit line. Since home equity is often your biggest asset and one you should be very careful with, lump sums are not a good idea.
How much a reverse mortgage costs depends on a number of different things. Your options depend on things like how old you are, how much your home is worth, how much equity you have in it, and so on.
Reverse mortgages are very interesting to a lot of people. The fact that the payments do not have to be taxed is definitely a plus.
