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Reverse Mortgages – Pros and Cons

by Mike

A few years ago my mom and dad were in a tough financial situation. They were both retired and unable to work due to health concerns, and they were struggling to get by on Social Security and a small monthly pension.

They still owed a lot on their mortgage, plus credit cards, and their property taxes were too high too. They thought they were going to lose the house they lived in for 22 years.

Then my brother in law read a story in the paper about reverse mortgages. He brought the article over and we all thought that it could be the solution to their problems. They went through with it and let me tell you it changed their lives forever.

In today’s economy where millions of senior citizens are in over their heads and living in houses they can’t afford, reverse mortgages can be a godsend.

Of course, a reverse mortgage is not something to take lightly. Before you sign any paperwork, be sure you do your homework and understand the pros and cons of reverse mortgages. Below I’ve listed some common reverse mortgage questions and answers, but you’ll definitely want to do more in depth research before going ahead with it.

How does a reverse mortgage work?

A reverse mortgage is a type of home loan that does not need to be repaid as long as you live there. In a regular mortgage you borrow money and then your monthly payments reduce your debt over time. As your loan balance rises your home equity increases.

When you reverse the process you use the equity you’ve built up in your home to borrow money. Since you don’t make monthly payments your loan balance actually grows larger as it accrues interest.

Put another way, with a regular mortgage you use debt to convert your income into equity. In a reverse mortgage its the opposite. You use your equity to income.

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What is the main benefit of a reverse mortgage?

Reverse mortgages allow you to tap into your home’s equity to supplement your retirement income and improve your quality of life. Many senior citizens find that Social Security and pensions are not enough to live on. Between the cost of food, medical care, prescriptions, property taxes, and other basic living expenses, there is often little money left at the end of the month.

Taking out a reverse mortgage can give seniors the extra cash they need to pay off bills, improve their home, travel, or do anything else they want with their retirement.

Who are reverse mortgages designed for?

Reverse mortgages are perfect for older homeowners who are “house rich and cash poor.” Perhaps you’ve built up equity in your home or your mortgage is already paid off, yet you do not have money to cover daily living expenses, medical bills, home repair and other expenses. in this situation a reverse mortgage may be right for you.

What are the eligibility requirements?

To be eligible for a reverse mortgage:

  • You and all co-borrowers must be age 62 or older.
  • You must own your home outright or have a very loan mortgage balance.
  • The home must be your primary residence.
  • How much money can I get?

Its difficult to give you an exact answer. The amount of cash you can receive from a reverse mortgage depends on several factors including the program you select, your age, current interest rates, your home’s value, and the amount of equity you have in it.

How do I get paid?

Reverse mortgages are generally paid out in one of the following ways: a monthly payment, a lump sum payment, a line of credit, or a combination of each.

Options can vary from one lender to the next. Look for one that offers the solution you need. Perhaps the most common choice is to take a lump sum to pay off credit cards and other debt and leaving the rest as a line of credit that can be tapped into if needed in the future.

When do I have to pay back the money?

A reverse mortgage doesn’t have to be reapid until you either move out of the house or die. If you sell and move somewhere else, you can use the proceeds from the sale to repay the mortgage. If you pass away, your heirs can repay the mortgage by selling the house or using their own funds.

Can I ever owe more than the house is worth?

No. Reverse mortgages are designed to avoid this. the most you can ever owe is the value of the home itself. So if your reverse mortgage balance is $220,000 but your home sells for only $200,000 the lender must take it as a loss. They can not come after you or your heirs for the remaining $20,000.

What about reverse mortgage disadvantages? Can I lose my home?

No, you can not be forced out of your home. With a regular mortgage, your lender can foreclose on your property if you fail to make your monthly payments. But since you don’t have to make payments on a reverse mortgage, foreclosure is never a concern. However, you do have to continue to pay your property taxes on time and keep the house from falling into disrepair.

The bottom line is this…reverse mortgages aren’t perfect and they aren’t for everyone. But if you or a loved one are in financial trouble and you meet the eligibility requirements a reverse mortgage could be exactly what you need to get back on your feet.

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{ 3 comments… read them below or add one }

fern

I thought this was a really incomplete article. You failed to address the single most controversial aspect of reverse mortgages: their cost.

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Mike

Reverse mortgage costs can be substantial but they can vary pretty wildly from one lender to another. Here’s an article I found that discusses the typical costs involved in a reverse mortgage and a rough estimate of what they each cost.

http://www.reversemortgage.org/Default.aspx?tabid=237

thanks for your feedback. :)

Mike

Reply

bryan

In the scenario above, if you want to move out of the house and the reverse mortgage balance exceeds the current market value, it does not make sense to me to try and sell the house, because you would still have costs associated with selling the house such as real estate commissions, etc. Wouldn’t it make more financial sense to just turn the house over to the bank and have them foreclose on the property? or am I missing something important.

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