New York - Reverse mortgages are used to obtain access to built-up equity within a home. For instance, if you have no mortgage on your house - you have equity equal to the fair market value of your home. If you only owe $10,000 on a $200,000 house, you have $190,000 of built-up equity.
A reverse mortgage is actually what it sounds. A bank agrees to a set amount of money that you can "borrow" and then pays you that money via a specified and agreed to timetable. The long-term effect of these mortgages is that your equity decreases by the principle amount given plus accrued interest (yes - you are charged interest). In most reverse mortgages, the loan amount plus interest is paid off by your estate after you die. In most cases, your entire equity, including the risk of gain or loss from market price fluctuations, is transferred to the bank. Payments from a reverse mortgage can be obtained via several methods including lines of credit, regular monthly payments, or a lump sum payment.
There are big benefits of a reverse mortgage. Specifically, you obtain immediate cash, no income taxes are due because it is a loan and not income and there are no capital gains. There are also big minuses. Specifically, the loan must be repaid either by your estate or you, you lose the benefit from additional increases in the value of your home, and you leave a reduced estate to leave your heirs.
Be careful that if you sign a reverse mortgage that pays for a fixed number of periods as opposed to your entire lifetime- you eventually could wind up losing your house. If you are still alive when the payments are up, your equity is zero, and you may need to begin payments back to the bank. This would be disastrous if you do not have any other income or did not save any of the amount. Government insured loans generally do not require re-payment of loans while you or your spouse are still living in the house.
We believe reverse mortgages are excellent planning methods but should be used with caution. Reverse mortgages are excellent methods for individuals whose primary savings vehicle was their home and don't have enough income to maintain stable quality of life. We also prefer reverse mortgages that pay over yours and your spouse's lifetime because of the preceding mentioned risk. If you don't need the cash to live, we believe you should stay away from reverse mortgages.
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