Senior citizens who are at least 62 years old and own a home can qualify for a reverse mortgage loan. This loan works by allowing borrowers to access a portion of their home equity while still retaining their home title. The money that can be obtained from the loan can be used by the borrower for any purpose they want such as repairing their homes, paying for health care expenses, traveling or ensuring they have funds through retirement.
While beneficial to senior homeowners, there are many things to take into account when getting a reverse mortgage loan. These include the following:
Closing Costs can be Hefty
In general, lenders will charge closing costs such as origination fees, mortgage insurance premiums and more. The lender should talk about these costs with the applicant upfront. Applicants who have questions on the costs associated with the loans must ask the right answers from the lender.
Interest is Charged to the Balance of the Loan
Those who will get a reverse mortgage loan will not be making payments toward the loan amount. Because of this, the balance of their loan will increase as interest is charged on it on a monthly basis.
Interest Rates for this Loan Vary
Just like other loans, interest rates for reverse mortgage loans vary by lenders and whether the borrower chooses a fixed rate or variable interest rate. That is why borrowers must be well-informed about the rate options available to them.
The Amount that can be Borrowed Depends on the Value of the Home
The majority of reverse mortgage loans come with a non-recourse clause which prevents borrowers or their heirs from getting more than the resale value of their home. For instance, if a homeowner borrows $200,000 and dies, his heirs should pay back the amount to keep the house or sell the home. In case, the house sells for just $18,000, the heirs don’t have to pay for the remaining $20,000.
The Loan Doesn’t Involve Deductible Interest
Although borrowers can use the money they get from the loan as a monthly income, the loan itself is not a source of income. Thus, borrowers cannot deduct the amount they borrow during tax time.
When looking to get a reverse loan, it is important to get it from a lender that specializes in this type of loan. A reverse mortgage loan is a major financial decision that must be taken seriously. It is recommended to study the lender, consult with a financial adviser or a reverse mortgage broker and talk to family members before making the final decision.