Pros & Cons of Interest-Only Vs. Reverse Mortgages
An interest-only mortgage allows a borrower to simply pay the interest on the debt without making a principal reduction each month. A reverse mortgage uses the equity in a home to pay the borrower each month, as opposed to the borrower paying the lender.
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Significance
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An interest-only mortgage requires the borrower to make payments to the lender, while a reverse mortgage is the exact opposite. However, a borrower of any age can get an interest-only mortgage, while only those age 62 and older can get a reverse mortgage.
Function
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An interest-only mortgage allows a borrower to make smaller monthly payments, however, the borrower is not building up any equity. In a reverse mortgage, a borrower is cashing in their equity to get rid of their mortgage payment.
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Considerations
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A reverse mortgage is almost double the closing costs of an interest-only mortgage, however, it is a good option for an older borrower on very limited income. An interest-only mortgage is usually interest only for a short term, and then the payments balloon.
Misconceptions
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Many people assume that an interest-only mortgage is a good idea for those looking to only live in the home for a few years, or those who are about ready to get a large raise. However, any number of variables could get in the way of these plans and the borrower should consider the risk involved with increased payments later as well.
Warning
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Interest-only mortgages tend to have interest-only payments in the short term, with a set time for the payments to balloon to principal plus interest payments. Additionally, the interest rate on most interest-only mortgages is variable and based upon current market conditions and could, therefore, rise significantly over the life of the loan.
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References
- Photo Credit Image by Flickr.com, courtesy of Jeff Turner
