Reverse mortgages are a special type of loan, commonly marketed to those in retirement.
Carl Carlson, CEO of Carlson Financial, has tips on why it is important to do your homework before taking one out.
Reverse mortgages are a type of loan available to borrowers age 62 or older. It allows the homeowner to borrow against the equity in their home, and then the loan is paid back when the homeowner moves or passes away, Carlson said.
The home is appraised and used as collateral for the loan, then the borrow can receive cash out of their home equity, up to certain limits. They may take the cash as needed, receive it in ongoing payments, or even get a lump sum. Interest will accumulate on the loan but does not have to be paid if the borrower meets certain conditions.
Reverse mortgages might make sense for someone who is trying to get their expenses down as the reverse mortgage will pay off the existing mortgage and get rid of the monthly mortgage payment. It might also make sense for someone who wants to turn their home equity into cash they can use, maybe for large or unanticipated expenses such as a home renovation or medical costs, Carlson said. Still others might turn around and invest the money they get from the loan, targeting a higher return.
Many people have equity in their homes that they are never going to use.
Some drawbacks are that a reverse mortgage will reduce the inheritance that gets left to heirs, because unless the heirs are able to pay off the reverse mortgage themselves, the house will be sold to pay it off and they will not inherit it.
Moreover, reverse mortgages are often very expensive compared to alternatives when you tally closing fees, interest, and the required mortgage insurance premiums.
Someone with good credit and enough income should consider and shop for other sources of cash before taking out a reverse mortgage.