There are a lot of new choices you face when you retire. One of those choices might be what type of home loan to get. Obviously, you could choose the type of traditional mortgage on your property that you can get at any adult age. However, you could also opt for a reverse mortgage only open to those who are 62 and older. Here are some similarities and differences between the two.
Similarity: They Both Require You to Own Your Home
A mortgage is a loan against the value of a property you own. Both traditional and reverse mortgages require you, as the person signing the contract, to own the property. As a reverse mortgage holder, you are required to use the home as your primary house as well. A vacation property or rental property will not do. The only exception is if you live in one of the units yourself in a multi-unit home with a small number of units.
Difference: A Reverse Mortgage Requires You to Own Your Home for Longer
A big difference between a reverse mortgage and a traditional one is the traditional one has a schedule to which you have to adhere. Usually, you have to pay a bit toward your mortgage each month. In a few years, the total is paid off. A reverse mortgage does not make you make payments back toward the balance while you keep living in the home. However, the freedom you give up is the freedom to move because the agreement lasts for many years.
Difference: A Reverse Mortgage Lets You Borrow in More Ways Than One
A regular mortgage usually lets you take out a set amount of money all at once. A reverse agreement allows you to do that if you want to. However, the unique reverse-loan mortgage parameters allow you to also choose other options, such as setting up a credit line. That lets you take out particular amounts of cash when the need arises. You can also ask for monthly payments of a certain size to be automatically made to you, if you prefer that method.
Similarity: Both Mortgage Types Have Associated Fees
Another similarity between the two mortgage types is there are fees associated with both. In the case of a traditional mortgage, some of those fees are often more obvious and concrete. For example, closing costs are clearly outlined. Also, an interest rate and loan duration are both established when you sign the contract. That means you know exactly how much interest you will pay by the end of the loan.
Since the duration of a reverse mortgage is unpredictable, the total interest you will pay on one is equally unpredictable. The only thing you have control over is choosing the lender that offers the best interest rate. That way you can minimize the amount of interest you will eventually pay as much as possible, even though you cannot know what the total will be.
Similarity: Both Loan Types Come with Home Loss Risks
A common concern of getting a traditional mortgage on a retirement income is that you might be unable to make your mortgage payments. That could lead to eviction. A reverse mortgage does not have that particular risk, but home loss can still occur. For example, if you ever file for bankruptcy, your reverse mortgage is called in. You also have to prove you can pay taxes and care for the property. Additionally, the home can be sold for the lender to get funds back, if you ever move out and do not pay the balance you owe.
Making a Final Comparison and Mortgage Assessment
To make a final comparison and mortgage assessment, you have to do your homework, as you can see. Talking to a reverse mortgage counselor who has no stake in your decision is an ideal option. If he or she is not affiliated with your preferred lender, you will get completely unbiased advice on the subject.