When you retire, you become eligible for a different type of home loan. That loan can make your retirement more comfortable, potentially. It’s called a reverse mortgage. The question is can you really benefit more from a reverse mortgage than from a traditional mortgage? There are several ways in which the two types of home loans are similar, but there are also several major differences. You need to compare and contrast the two before deciding.
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Both traditional and reverse mortgages involve borrowing against your home equity
To get a traditional mortgage or a reverse mortgage, you must own your own home. That is because both are methods of accessing the equity, or cash value, of your home. That means you must have a home to get a mortgage of any type. Also, your home must have some real value to borrow against in either case.
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Both traditional and reverse mortgages provide you with quick cash
Another similarity is either type of mortgage agreement will provide you with quick cash. However, a standard home loan usually provides you with a lump sum. A reverse mortgage offers that option, but receiving ongoing monthly instalments is also a popular option. You can also choose to borrow only when you need certain amounts of money with a reverse mortgage by opening up a home equity line of credit.
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A reverse mortgage is a longer type of home loan
One major difference between a traditional mortgage and a reverse mortgage is the length of the loan agreement. You might take out a regular home loan for a relatively short period of time, such as three or five years. A reverse mortgage is meant to last much longer. You owe no portion of it back early in the agreement, and the loan stays active for as long as you remain living in the location. That means a reverse mortgage agreement can last for a non-specific period of time somewhat within your control. However, one of the possible disadvantages of reverse mortgages is a lengthy loan agreement creates more debt to eventually pay back. That is because the loan continues to accumulate interest over time.
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A reverse mortgage is only available when you retire
You can get a traditional home loan at any stage in your adult life, as long as you meet all qualifications. However, you can only obtain a reverse mortgage after reaching 62 years of age. Perhaps this is a time in your life where you’re thinking about refinancing your mortgage. The reason is the reverse mortgage was specifically developed as a response to the unique financial challenges associated with retirement. When you retire, you may not have the financial stability to survive without taking out a mortgage on your home. At the same time, you may be unable to afford to make traditional mortgage payments. A reverse mortgage doesn’t require you to adhere to a schedule when repaying the loan.
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It is more difficult to default on a reverse mortgage
Another difference between standard and reverse mortgages is the ways in which you can go into default, or violate the loan agreement. With a standard mortgage, you risk eviction if you miss payments. A reverse mortgage comes with no such risk because payments are not scheduled to begin with. However, it is still possible to violate your reverse mortgage agreement.
Your reverse mortgage agreement will require you to live in the home on a full-time basis. It will also require you to be capable of taking care of property maintenance, including payment of property taxes. If you fail to meet those obligations, file for bankruptcy, or move out of the home, the agreement will be violated. At that point, whatever amount you still owe will become due.
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A reverse mortgage protects your other assets
A reverse mortgage is also popular retiree option because it is possible your home can be sold if you cannot pay the balance eventually, but your other assets are protected. For example, your cars or other property cannot be confiscated to cover the debt. Only the home itself is at risk, and only when you move or otherwise violate your loan terms without paying the full amount owed.
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