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It takes a significant amount of capital to fund a decent quality of life after you have retired. Many times people end up, for one reason or another, not accumulating enough wealth to last them for the remainder of their life after they have stopped working to earn money. This means you will have to find some way to obtain the funding you need. One way many people accomplish this is through the use of a reverse mortgage, which is a loan taken out using the equity you have in your home as collateral.

There are various advantages and disadvantages you should be aware of when deciding on a reverse mortgage loan.

Advantages of a reverse mortgage

The main advantage of receiving a reverse mortgage loan is it provides you with immediate cash you can use in any way you need to. This can be essential for those who find themselves in a tough financial situation for whatever reason. As mentioned before, retirees commonly find themselves in this situation but there could be other circumstances making a reverse mortgage the best option. For example, an unexpected medical emergency may force you into a desperate financial bind.

A reverse mortgage can help retirees stay in the home and neighborhood they prefer for the remainder of their lives. When a retiree is in a financially desperate situation, one option would be to sell the retiree’s home. However, this will mean the retiree will likely be forced to move out of one’s home and move to another residence. With a reverse mortgage the retiree can fund their living expenses while also ensuring the ability to stay in the retiree’s home.

Disadvantages of a reverse mortgage

Those looking into a reverse mortgage should take into consideration the drawbacks associated with doing so. One of the most significant drawbacks of a reverse mortgage are the fees and costs associated with receiving this type of loan. Reverse mortgages come with various lender fees, insurance charges and closing costs.

Also, another disadvantage of reverse mortgages is, unlike regular mortgages, you will not be allowed to deduct interest payments on reverse mortgages when filing your taxes. You are only able to claim deductions on interest paid after you are done paying off the loan.

You will also still have to worry about your home being foreclosed upon with a reverse mortgage. Despite not having to make monthly payments, the lender can still foreclose on your home if you fail to pay property taxes, neglect HOA fees as well as neglecting a variety of other duties related to the home.

Lastly, you should also consider that a reverse mortgage could make you ineligible to receive Medicaid or Supplemental Security Income (SSI).

Should you apply for a reverse mortgage?

Ideally, it would be best to manage your personal finances effectively, so you do not need to consider a reverse mortgage during retirement. However, if you do find yourself in a particularly challenging financial situation, whether a reverse mortgage is right for you will depend on a variety of factors particular to your specific financial circumstances.

Raymond James Financial Services, Inc. does not provide advice on mortgages.