If you're in search of more retirement income, you may consider tapping the equity in your home. Taking out a new mortgage or a homeowner's equity loan gives you money but leaves you with a current obligation to make loan payments.
A reverse annuity mortgage (RAM) turns your equity into income without a current obligation to pay it back. That may be a big benefit. But it's a costly loan - and one that should prompt you to appraise alternative ways to free up your home equity.
A reverse annuity mortgage (RAM), home equity conversion mortgage (HECM), or a reverse mortgage (RM) are common names for the same thing. They represent a special type of mortgage on a home where an elderly borrower (62 years old or older) may borrow against his home's equity to receive a monthly payment, and/or lump sum payment of cash.
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Unlike a typical mortgage where your principal and interest payments reduce your debt, these 'reverse' mortgages cause the loan amount to increase over time as you receive money but make no payments back. However these reverse mortgages don't allow your loan obligation to exceed the value of the home.
Of course, a reverse mortgage must be paid off eventually. At that time the mortgage balance and all accrued interest is paid back. This happens when:
* The last owner of the property named on the loan dies
* The home owner(s) sell the home
* The home owner(s) permanently move out of the home
A reverse mortgage seems ideal for an older person who needs income but wants to stay in his or her home. But unless housing prices are growing fast each year, your reverse mortgage loan will most likely eat up all equity in your home to leaving nothing to your children.
Lenders of such loans want to be assured of making money. This assurance translates into
* loan costs and fees that are typically greater than conventional mortgages, and
* limited access to your home's equity for your use
Be sure to compare these drawbacks to selling your home and using the proceeds to buy or rent a new home - perhaps one more user-friendly to you. Find out:
* How much cash you could get by selling your home?
* What it would cost you to buy or rent a new home?
* How much money you could safely earn on any money left over after you buying a low cost new home?
* How much to move into assisted living or other alternative housing?
Determining the cost of these alternatives will either:
* Show you that another housing option is a lot more attractive than a reverse mortgage, or
* Confirm that getting a reverse mortgage is the best option for you.
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