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Reverse Mortgage
Explanation:
A type of loan that allows you to borrow money, using the value of a home you already own as collateral. Borrowers may either receive payment in a lump sum or on a monthly basis, and though what they borrow will accrue interest over time, repayment is not required until the borrower sells the home, moves, or passes away. That is the main differentiating factor between a reverse mortgage and a second mortgage, which requires regular monthly payments. Reverse mortgages are structured so as to prevent the value of the loan from exceeding that of the home during the loan's term.
More specifically, there are three types of reverse mortgages: 1) Single-purpose reverse mortgages -- The most affordable type of reverse mortgage, they are offered by state or local government agencies and non-profit organizations and may only be used for a designated purpose, such as home repairs; 2) Home Equity Conversion Mortgages -- Commonly known as HECMs, they are backed by the US Department of Housing and Urban Development, may be used for any purpose, and often charge high upfront costs; and 3) Propriety reverse mortgages -- Essentially the same thing as HECMs, they are offered by private companies and do not have federal backing.
To qualify for a reverse mortgage, you must be at least 62 and have significant equity in your home. Depending on the type of reverse mortgage you take out and the lender you use, there may be other requirements as well.
Our Thoughts:
A reverse mortgage can be a great way for retirees to supplement their retirement income or delay taking Social Security in order to garner better benefits down the road. However, it's important to realize that reverse mortgages do carry certain risks. First of all, the upfront costs can be substantial. In addition, since you are required to actually live in the home that serves as the basis for your reverse mortgage, the need to move into a retirement community or head to a warmer climate could result in your loan becoming due, necessitating the sale of your home before you are ready. What's more, a reverse mortgage is not a great option for someone who wishes to leave their familial home to their children, as most people will not be able to pay off a reverse mortgage without selling the property to which it is tied.