Is a Reverse Mortgage Right for Me?

smashing a house

There are a lot of misconceptions about reverse mortgages, and it’s extremely important to have a clear understanding of any type of loan before signing on the dotted line. Based on its name alone, many people don’t even realize that a ‘reverse mortgage’ is a loan at all. In fact, the concept of a reverse mortgage has famously been distorted using tricky advertising in order to scam vulnerable seniors out of large sums of money.

Who qualifies for a reverse mortgage?

In order to apply for a reverse mortgage, you must first be at least 62 years of age. You must also have a mortgage that is completely paid off, or nearly so. If you own your home jointly, the co-owner must also be over the age of 62.

How does a reverse mortgage work?

Retirees who have valuable homes that they paid off during their working years have a decent amount of equity at their fingertips. Home equity is simply how much a home is worth minus any balance owed by the homeowner. For example, the owner of a property that has been appraised at $200,000 has $200,000 worth of equity if they have paid off their mortgage in full. If they still have $10,000 left to pay on the mortgage, they have $190,000 of equity in the home.

A senior who is struggling to make ends meet with their retirement funds alone can essentially ask a lender for a loan using their home equity as collateral. They can receive a lump sum, monthly payments, or a line of credit to use as needed. Generally, reverse mortgage loans aren’t due to be repaid until the borrower dies or moves out of the home. At such time, the lender must be repaid for the amount of equity that was borrowed, plus interest.

Everyone should get a reverse mortgage! Right?

While on the surface it sounds like the perfect solution for struggling retirees, there are quite a few things that make reverse mortgages less than ideal. First and foremost is the fact that this type of loan isn’t based on income or credit scores, which means a higher risk for lenders. Along with higher risk comes an increase in loan origination fees and a higher interest rate than an alternative ‘home equity loan.’

The upfront fees combined with a high interest rate mean that the borrower will see a lot less money. While the equity in any home technically belongs to the homeowner, by ‘cashing in’ early on the equity, a significant heft of it will go to the institution that approves the reverse mortgage loan.

Repayment of this type of loan is triggered when the borrower/homeowner either moves out of the home or dies. Upon moving, the proceeds from the sale of the home are usually enough to pay back the reverse mortgage loan in full. If the homeowner passes away, however, his heirs will have to repay the loan in full if they want to keep the home. Leaving your heirs to pay back money you borrowed can put a strain on family relations among your survivors.

Also, although homeowners who take out a reverse mortgage will not have to make monthly mortgage payments, there are still a lot of other costs related to home ownership. Property taxes, homeowners association fees, property insurance and home maintenance costs will still need to be paid.

The bottom line is that there are other better options for most retirees who find their retirement income falling short of their expenses. Anyone considering a reverse mortgage should do extensive research first, including talking to a credit counseling attorney that they trust. Stay tuned to this space for our next post, where we will talk about the difference between a reverse mortgage and home equity loans, along with how to spot a scam before it’s too late.

 

 Image credit: Images of Money

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