Some financial situations call for a reverse mortgage to be taken out. If you aren’t familiar with a reverse mortgage, it’s essentially converting your home equity into cash. All that built up equity throughout the years of mortgage payments can be used as an extra source of income. Obviously it’s not all that simple and there are negative aspects that come along with it but with responsibility it can help you reach your financial goals.
When you are approved for a reverse mortgage, you can choose between plans that disperse your money in different ways. Here are some examples.
One way is by choosing a fixed-rate payment plan which gives you your money in a single disbursement lump sum payment. If you have a high mortgage balance, you can use this type of payment plan to pay it all off. How it works is that you receive your payment all at once your reverse mortgage closes. If you have a large mortgage payment that needs be taken care of, this method is preferable. The downside is that you won’t be able to take any additional proceeds from this payment plan. If you are not good at handling your finances adequately, you could end up aimlessly wasting your money.
The other option is called an adjustable-rate payment plan. There are several adjustable rate plans that determine the type of interest that will be tacked on to the loan.
A term payment plan is an adjustable rate plan that gives you equal monthly payments for a certain amount of time. If you have an understanding on how long you want to live in the house, then this is the right plan for you. You’ll receive your monthly payments and will be able to continue living in your house as your principal residence. The downside is that your home equity could be used up very quickly which will leave you with a limited pool of finances.
A tenure payment plan offers less money monthly and requires one other person living in your home to be the principal resident. It provides a stable monthly income for the borrower and is a good choice for residents that are in good health and have a long life. The downside is that it’ll be hard to pay off any bill that’s of a large amount. Also, if you have to move out of the house for any health reasons, the reverse mortgage immediately becomes due and has to be paid off. Be on the lookout for the market because depressed figures can mean high interest rates.
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Kuba Jewgieniew is the head of Realty ONE Group, a real estate brokerage firm ranked #5 in real estate by Real Trends.