If you are over the age of 62 and in a bind financially, chances are you have considered, or at the very least thought about, reverse mortgages. There is a lot of mysticism surrounding such a large financial move. This mysticism, though, almost always comes from a lack of understanding of reverse mortgages and what the upsides and downsides to these mortgages are.
In essence, reverse mortgages allow you to tap into and withdraw equity from your home provided it is your primary residence and you are, again, over the age of 62. An option like this can easily help those in need of money as they reach the age of retirement. This being said, there are a multitude of pros and cons one must consider before getting a reverse mortgage.
Plain and simple, reverse mortgages give you money that you have previously pumped into your house. This money, which is currently in the form of your estate, is sitting there doing nothing. Because it is, after all, your money, you might as well put it to good use to improve your quality of life. This is a simple and concise upside, but it outweighs many negatives more often than not.
Perhaps the greatest upside that reverse mortgages have to offer is the allowance of you living in the house that you are withdrawing equity from. This means that you are essentially getting double out of your estate: you are both living on it and getting money for it at the same time. This comes at a cost, though.
The principle that reverse mortgages operate on is often misunderstood. When signing, you are in essence handing over control of pieces of your equity at a time and receiving money for them. While you are allowed to live in the house regardless of if the entire equity has been paid for by the reverse mortgage agency or not, it is important to realize that upon death or moving to a nursing home, this estate is no longer yours.
The estate will not be passed on to your heirs; however, you can rest assured that if they want the estate they will have the option of repaying the loan before the property is sold. Basically, you are tapping into what you will leave behind for money in the short-term. This tradeoff is not right for everyone, so you need to consider all of the options before going for it.
The caveat that always comes with the aforementioned points is that you will not receive cash anywhere close to full value for your house. A common estimate is less than half of the value. In this way, you are sacrificing all of your equity that would otherwise be passed on to your heirs in order to receive half of it as cash.
If you need money desperately or have no direct heirs, this may be incredibly enticing. Regardless, you will definitely want to spend some time researching rates and specific arrangements if you are looking into reverse mortgages as an option whatsoever.