How a Traditional Loan and a Reverse Mortgage Compare

A home loan in retirement might be a good idea. You could use that extra money for many different purposes from relaxation to emergencies. The decision you have to make when you are at least 62 years old is whether to get a traditional home loan or a reverse mortgage, the latter of which becomes available to you at that point. Comparing the two is necessary so you can choose.

The Basics of a Traditional Home Loan

A traditional mortgage is a contract you sign that lasts for a period of time established upfront. Three-year and five-year traditional mortgages are common. Though there are exceptions. After you sign such an agreement, you usually receive a lump sum capped at a specific amount, but you also receive mortgage bills. The sizes of your regular payments are set up in such a way that you pay the total with interest by the end of the loan period.

 The Basics of a Reverse Home Loan

A reverse home loan is a mortgage with no pre-established loan period and an understanding that it is to last for a long time. That time could be many more years than you would have an active standard loan agreement. It all depends on how long you stay in your house and are able to meet the other terms of the loan contract. One advantage is that, for the duration of that agreement, you never receive scheduled mortgage bills you have to worry about.

Reverse Mortgages Do Come with Some Pitfalls

Borrowing money with no obligation to pay it back for years can sound ideal. However, you need to understand reverse mortgages do have some pitfalls. For example, as you apply for reverse-mortgage assistance, interest might quickly pop up on your radar as a potential problem. Since it can have a decade or longer to accumulate, down the line you may need to pay a lot more than you ever borrowed. That may not be a concern now, but you need to keep thinking about it, especially during the initial loan application process. Looking for the best interest rate can save you a lot later.

Another pitfall of a reverse mortgage to watch out for is you and your mortgage are both tied to your home. You can go on vacation, of course, but you cannot move away. Usually, there is a period of time established, such as six months. If you leave your home for longer than that amount of time, you are considered to be in violation of the contract.

Violating a Traditional Home Mortgage Agreement Versus a Reverse Mortgage Agreement

The most common way to violate a traditional home mortgage agreement is to fail to make mortgage payments on time. Repeated violations can cause the bank to evict you and your family from your home. A reverse mortgage actually requires you to keep living in the home. It also has no requirement to pay it by a certain day each month. In fact, you do not have to make monthly, or even yearly, payments on it at all. Instead, you violate the loan agreement by moving out or by failing to do what you are required to do as the owner of the home. For example, going bankrupt or missing tax payments is not allowed.

Keep Right on Comparing Your Options

The most important thing to remember when you want to choose between mortgage types is to take your time. Do not make a hasty decision. Make sure you have a full understanding of what is gained and lost with each mortgage type. Then you can determine if a retiree reverse mortgage is actually going to benefit you the most or not.


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