If you are 62 years or older and you have equity in your home, you may want to consider a reverse mortgage (officially known as a home equity conversion mortgage) instead of a home equity loan.
A reverse mortgage is a federally-insured mortgage, only available to homeowners 62 years or older. You get the proceeds of the loan in one of three ways; as a lump sum, in monthly installments, or as you need it (a line of credit). You don’t make mortgage payments, but you are required to pay your taxes and homeowners insurance. And if you get a reverse mortgage on a property that already has a mortgage, the existing loan will be paid off and a new loan put in place.
When you sell your home, or if you die before then, the reverse mortgage is paid off including interest and fees that have accrued on the loan and any equity left in the home goes to your heirs or estate. If your home’s value has dropped, however, and there is not enough equity to pay off the reverse mortgage, then the lender takes the loss regardless of other assets you may leave behind.
The advantage of this type of mortgage for an entrepreneur is clear: if it takes you longer to generate cash flow than expected, you won’t be scrambling to make payments on your mortgage or a home equity loan.
Will a Reverse Mortgage Hurt My Credit?
In the past, lenders didn’t even look at borrower’s credit reports, making these loans especially attractive to those with past credit problems. But due to losses by the FHA, a “financial review” that includes a credit check is required as of March 2015. That doesn’t mean you can’t get a reverse mortgage if you have bad credit, but it does mean you may need to provide an explanation for how you plan to use funds to pay back currently delinquent debts. Still, a reverse mortgage isn’t reported on traditional credit reports, so taking one out won’t hurt the business owner’s credit history.
These loans can get expensive, and some older people have been sold loans that weren’t appropriate for them. Of course, there is always the risk of sinking your home equity into a business venture that might fail. You can lose your equity and have nothing to show for it. As a result of past abuses in this industry, you are required to get mandatory counseling from a HUD-approved counselor before you can get one of these loans.
Reverse Mortgage vs. Home Equity Loan
On the other hand, unlike a home equity loan, you won’t be kicked out of your house because you can’t make your loan payments. You must keep up with your property taxes and required assessments such as homeowner association dues, though, or you could lose your home. The lender will also require you to keep a minimum amount of homeowner insurance in force to protect the lender in case of a fire or other catastrophe. You will have to be able to document that you can afford to continue to make your insurance and tax payments in order to get one of these loans.
For more information please read Finance Your Own Business: Get on the Financing Fast Track, by Garrett Sutton, Esq. and Gerri Detweiler. This content is excepted and copyrighted from this book.
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About the Authors
Garrett Sutton, Esq., author of Start Your own Corporation, Run Your Own Corporation, Loopholes of Real Estate, The ABC’s of Getting Out of Debt, Writing Winning Business Plans and Buying and Selling a Business in the Rich Dad Advisors series, is an attorney with over twenty-five years experience in assisting individuals and businesses to determine their appropriate corporate structure, limit their liability, protect their assets and advance their financial, personal and credit success goals.
Gerri Detweiler is the author of four books, including the Ultimate Credit Handbook (named one of the top five personal finance books of the year when it was released), and a media favorite quoted in publications like USA Today, The Wall Street Journal and featured on The Today Show and CNN. A credit educator since 1987, she’s served on credit reporting agency Experian’s Consumer Advisory Council twice.