When it comes to retirement planning and finding a source of cash-flow, one way you can take advantage of the equity built up in your home is to get a reverse mortgage. This type of home equity loan allows you to receive money while you live in the home, without having to make payments until you move out of the home or pass away.
Here are some tips that you may want to consider if you are applying for a reverse mortgage:
Make Sure You Have Plenty of Home Equity
Your reverse mortgage will depend on the amount of equity that you have in your home. Unlike a traditional loan, reverse mortgage approval is not based on your income level or credit score. But you will want to make sure that you have built up substantial home equity for this type of loan.
Get an FHA Reverse Mortgage
While there are a number of lenders that offer reverse mortgages, not all of them are approved to issue FHA-backed loans. The Federal Housing Administration offers a reverse mortgage product called the Home Equity Conversion Mortgage (HECM). If you are interested in the HECM, you will need to consult an FHA-approved lender. Many retirees choose an HECM because it comes with certain protections ― however, you should note that FHA loans also come with certain restrictions.
Shop Around for the Best Deal
Like any other mortgage loan, a reverse mortgage comes with lender fees and interest charges. You may not be required to pay them up-front, but they will have to be repaid eventually (along with the loan, usually when the house is sold). If possible, try to get a reverse mortgage with reasonable interest rates and fees, as that will affect the amount of money you receive from the lender.
Consider Your Heirs
If you get a reverse mortgage, it means that your heirs will likely not inherit your home. Because of the way reverse mortgages work, the home will be sold upon your passing to repay the loan. If your heirs want to keep the house, they will have to repay the loan using other assets from your estate, or by using life insurance proceeds. Therefore, if you want to be able to pass on your home (as well as other assets), a reverse mortgage is probably not the right choice.
Understand the Fine Print
A reverse mortgage is does not only have to be repaid when you pass away, it also comes due if you move out of your home ― this includes homeowners who have to relocate to nursing care facilities. Make sure you read everything carefully and don’t be afraid to ask questions. Never sign a document that you don’t fully understand.
A reverse mortgage can be a great financial tool in many circumstances. However, this loan product is not for everyone, and you should be cautious when making the decision to obtain this type of mortgage loan.