What Is A Reverse Annuity Mortgage?
A reverse annuity mortgage, or RAM, is a loan for seniors who have paid off their houses but cannot afford to stay in them or require extra money for home repair, long-term care, medical treatment, or other reasons. It allows a homeowner to convert some of the equity he or she has built up in his property into cash. The loan is repaid when the borrower dies, sells his house, or moves out of it.
There are two types of RAMs: fixed-rate and adjustable-rate.
- With a fixed-rate RAM, the interest rate is set for the life of the loan, so your monthly payments will never change.
- An adjustable-rate RAM has a lower interest rate for the first few years of the loan, but it can adjust upward after that, which could increase your monthly payments.
How Does A Reverse Annuity Mortgage Work?
A RAM is a loan against your home equity, so you don’t have to sell your house or take out a new mortgage. The lender gives you a lump sum of cash, which is typically tax-free, and you can use it for any purpose. You don’t have to make monthly payments on the loan, but the interest accrues and is added to the loan balance. This means that if you live in your home for a long time, the loan could grow to be larger than the value of your home.
When the loan becomes due, you or your heirs can either sell the house to repay the loan or turn it over to the lender. If the sale price of the house is more than the outstanding balance on the loan, you or your heirs get to keep any leftover equity. But if the sale price is less than the balance of the loan, you or your heirs are responsible for paying off the difference.
Pros And Cons Of A Reverse Annuity Mortgage
There are both pros and cons to taking out a RAM.
Some of the advantages include:
- You can stay in your home as long as you want without having to make monthly payments.
- You can use the money from a RAM for any purpose, including home repairs, medical expenses, or living expenses in retirement.
- A RAM can provide a source of tax-free income in retirement.
Some of the disadvantages include:
- The interest on a RAM accrues over time, which can increase the balance of the loan and reduce the amount of equity you have in your home.
- If you live in your home for a long time, the loan could grow to be larger than the value of your house.
- Your heirs may have to sell the house to repay the loan if you die or move out of it.
If you are considering a reverse annuity mortgage, it is important to weigh the pros and cons carefully to decide if it is right for you. You should also speak with a financial advisor to see if a RAM is a good fit for your situation.
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