Understanding the Impact of Reverse Mortgages on Life Insurance in Bankruptcy
A reverse mortgage, available to homeowners aged 55 or older, is a type of loan that leverages the equity in your home. Equity, in this context, refers to the debt-free value of your home that you have acquired over the years. If you are approved for a reverse mortgage, you begin to receive money based on your home’s equity instead of making monthly mortgage payments. This could come as a lump sum, several lump sums, or monthly cash installments. However, there’s more to it, especially when considering interest rates and how they can affect your home’s equity.
The Costs of a Reverse Mortgage
While the concept of a reverse mortgage may seem appealing, it’s essential to understand its costs, especially when it comes to the interest on the loan. High interest rates are common in reverse mortgages, and these can rapidly accumulate over the years, potentially exhausting the equity in your home. This could ultimately leave you without any home ownership or equity.
Unlike regular mortgages, reverse mortgage holders are not required to make any payments while the loan is in effect. The interest on your reverse mortgage continues to accumulate, causing the equity or the amount you’ve invested in your home to decrease over time.
Should you sell your house or it ceases to be your primary residence, you are obligated to repay the reverse mortgage loan and any accumulated interest. It’s essential to understand the interest you are paying, whether that interest rate is fixed, and to compare this with other loan types if you need a loan. Depending on your house’s value, your reverse mortgage loan sum could be up to 55% of its current value, which can amount to a significant sum attracting interest.
An increasing number of baby boomers are showing interest in reverse mortgages, thanks to their promise of increased cash flow during retirement. However, the growing popularity of these loans is largely due to lenders banking on people not questioning the elevated interest rates and compound interest rates involved. These rates can range from 4 to 12 percent, and borrowers need to be aware of the associated fees and closing costs, which can vary from $3,000 to $12,000, depending on the lender and agreement.
The compounding nature of reverse mortgage interest means the mortgage balance can grow at an alarming rate. For instance, if you borrow $200,000 at 6 percent interest, without making regular payments, your debt would rise to $320,000 after 10 years, and this total is even higher when semi-annual compounding is factored in. Consequently, when you pass away or sell your home, this increased amount will have to be repaid, leaving less of your home equity to go around.
Choosing the Right Path
Before choosing a reverse mortgage, it’s essential to explore all options and consult with unbiased financial advisors, family, and friends. These individuals do not have vested interests in your mortgage or financial decisions and can provide impartial advice. It’s vital to consider all aspects of your financial situation, including how bankruptcy could affect life insurance money.
Contact Rumanek & Company Ltd. for more information on bankruptcy and debt solutions. Or please fill out the free bankruptcy evaluation form. To learn more please visit our YouTube Channel. Rumanek & Company have been helping individuals and families overcome debt for more than 25 years.