If you’re 62 or older and looking for money to finance a home improvement, pay off your current mortgage, supplement your retirement income, or pay for healthcare expenses, you may be considering a reverse mortgage. It’s a product that allows you to convert part of the equity in your home into cash without having to sell your home or take on additional monthly bills.
In a “regular” mortgage, you make monthly payments to the lender. In a “reverse” mortgage, you receive money from the lender and generally don’t have to pay it back for as long as you live in your home. Instead, the loan is repaid when you die, sell your home, or when your home is no longer your principal residence. The proceeds of a reverse mortgage generally are tax-free, and many reverse mortgages have no income restrictions.
If you’re considering a reverse mortgage, be aware that:
- Lenders generally charge origination fees and other closing costs for a reverse mortgage. Lenders also may charge servicing fees during the term of the mortgage. The lender usually sets these fees and costs.
- The amount you owe on a reverse mortgage gets bigger over time. Interest is charged on the outstanding balance and added to the amount you owe each month. That means your total debt increases as the loan funds are advanced to you and interest on the loan accrues.
- Most reverse mortgages have variable rates that are tied to a financial index and are likely to change according to market conditions. Some reverse mortgages have fixed rates.
- Reverse mortgages can use up all or some of the equity in your home, leaving fewer assets for you and your heirs. Most reverse mortgages have a “nonrecourse” clause, which prevents either you or your estate from owing more than the value of your home when the loan is repaid.
- Because you retain title to your home, you are responsible for paying property taxes, insurance, utilities, fuel, maintenance, and other expenses. So if you don’t pay these expenses, you risk the loan becoming due and payable.
- Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole.