Advantages and disadvantages of reverse mortgages

Comparing the advantages and disadvantages of reverse mortgages will help you decide whether this type of borrowing is the right one for you. This is a complicated subject so we've tried our best to simplify things for you.
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For those not in the know a reverse mortgage is a legal agreement in which a bank takes on the residual mortgage amount and pays an annuity to the homeowner.


Let's start with the pros rather than the cons. With this type of mortgage there are no monthly payments during the length of the loan. All of the accrued monthly costs like insurance premiums and interest charges are paid at the end of the loan period. Any income generated from a reverse mortgage is non-taxable and the value of the property rather than the homeowner's income when the loan's taken out is the determining factor. If you pass away still owing money on the property, your children aren't liable if the property sells for less than the mortgage amount. You can also borrow more with this sort of mortgage as the house's equity increases.


To get a balanced picture you should also consider the issues attached to reverse mortgages. To get the home's title transferred to an heir, the loan has to be paid in full. As the equity in the property is used to determine the loan amount, with each payment you lose equity so you may not have enough equity left for essential improvements to your property. With this type of loan the interest rates are normally higher than they are for more traditional mortgages or other types of equity loans. The fact that reverse loan interest rates are variable can also be an issue for homeowners as the rate will increase and decrease with market conditions.

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