What is a Reverse Mortgage? A reverse mortgage is a loan that allows you to borrow against the equity in your home. Unlike traditional mortgages, where you make monthly payments to the lender, with a reverse mortgage, the lender makes payments to you. You don't have to pay back the loan as long as you continue to live in the home, but you do have to pay property taxes and homeowner's insurance.
There are two types of reverse mortgages: Home Equity Conversion Mortgages (HECMs) and proprietary reverse mortgages. HECMs are insured by the Federal Housing Administration (FHA), which means they have certain protections for borrowers. Proprietary reverse mortgages are not insured by the government and may have different terms and requirements.
What is a Home Equity Loan? A home equity loan, also known as a second mortgage, is a loan that allows you to borrow against the equity in your home. Unlike a reverse mortgage, where the lender makes payments to you, with a home equity loan, you receive a lump sum of cash and make monthly payments to the lender.
Like reverse mortgages, home equity loans have two types: fixed-rate loans and adjustable-rate loans. Fixed-rate loans have a fixed interest rate and monthly payment, while adjustable-rate loans have an interest rate that can fluctuate over time.
Pros and Cons of Reverse Mortgages Pros:
- You don't have to make monthly payments on the loan as long as you live in the home.
- You can use the money for any purpose.
- You can choose to receive the money as a lump sum, line of credit, or regular payments.
- The loan is not due until you move out of the home or pass away.
Cons:
- The fees associated with a reverse mortgage can be higher than with a home equity loan.
- The interest rate on a reverse mortgage may be higher than on a home equity loan.
- The amount of equity in your home will decrease over time, which may affect how much money you can leave to your heirs.
- You are still responsible for property taxes and homeowner's insurance.
Pros and Cons of Home Equity Loans Pros:
- You receive a lump sum of cash upfront, which can be useful for large expenses.
- The interest rates on home equity loans are often lower than on other types of loans, such as credit cards or personal loans.
- You can choose between a fixed or adjustable interest rate.
Cons:
- You have to make monthly payments on the loan, which can be a burden if you're on a fixed income.
- You can only borrow up to a certain percentage of the equity in your home.
- If you default on the loan, you could lose your home.
Which Is Right for You?
Deciding whether to take out a home equity loan or a reverse mortgage depends on your individual circumstances. If you need a lump sum of money upfront and are comfortable making monthly payments, a home equity loan might be the best option for you. On the other hand, if you're on a fixed income and don't want to make monthly payments, a reverse mortgage could be a good choice.
It's important to talk to a financial advisor and do your research before making a decision. Be sure to compare rates and fees from multiple lenders to ensure that you're getting the best deal possible. With careful consideration and planning, a home equity loan or reverse mortgage could be a helpful tool to help you achieve your financial goals.