A reverse mortgage enables the borrower to cash out a part of his equity in the home. The offer is drafted to support people who are nearing their retirement to make use of the money they have blocked in their home, to clear the existing debts, to pay for medical treatment or for meeting regular expenses. There is no limitation as to the use of the loan amount. As there is the reverse in the traditional mortgage payback stream in this offer, it is termed as reverse mortgage.
In reverse mortgage, the borrower need not settle the loan until the house is vacated or sold. There is no need for you to make monthly payments towards the loan balance, but you need to bear the tax and insurance charges. One of the major advantages in reverse mortgage is that there are no monthly payments to be made towards the unsecured loan. Many senior citizens opt for reverse mortgage to improve the quality of life as the money obtained through the source can be spent to satisfy the financial requirements.
There is no risk associated with the loan. As there is no need for monthly payments, the issue of default is ruled out. You are not committed to an amount more than the worth of the property. Although the lender has granted an amount more than the worth of your home, the maximum due would be the market value of the property when the property is disposed. Since the equity in the home is converted into income, you are exempted from taxes. The approval is also quite fast and neither your credit nor your income is considered for the approval of the reverse mortgage.
How reverse mortgage work?
A reverse mortgage loan amount can be disbursed either lump sum, or line of credit or fixed monthly payments or a combination of any of the three options. The homeowner retains the title of the loan. There are also some disadvantages associated with the loan. The loan balance gets accumulated. The interest is charged on the monthly balance of the loan. Since there is no repayment of the loan amount, the loan balance keeps accumulating. The closing cost for the reverse mortgage is higher than the closing cost associated with a conventional loan.
Fortunately, there is the option of rolling over the closing costs into the reverse mortgage and so the borrowers need not spend money for the purpose.
It should be remembered that when you opt for reverse mortgage, the loan grows in size over time. This reduces your equity in the house and the inheritance value is much reduced. However, the heirs can sell the home and retain the remaining equity in the home. If you want to retain your property, that could be done either by clearing the reverse mortgage or by refinancing the property.
The interest amount on the reverse mortgage is not exempted from taxes until the house is sold or the loan is settled. Once you start making payments to the lender, there can be deduction in the interest amount that is being paid back.