Reverse Mortgages

What is a Reverse Mortgage?
A reverse mortgage is a loan against your home that you don’t have to pay back as long as you live there.  To qualify for most reverse mortgages you have to own your home, live there and be 62 years of age or older.

How is it paid to me?
You can receive payment from the lender in several different ways:

  • all at once, in a single lump sum of cash
  • as a regular monthly case advance
  • as a credit line account that lets you decide when and how much of your available cash is paid to you; or
  • as a combination of these payment methods

No matter how this loan is paid out to you, you typically don’t have to pay anything back until you die, sell your home, or permanently move out of your home.  Interest is accrued on the borrowed amount until it is paid in full.

When Should I Consider a Reverse Mortgage Loan?
Though you do not need to “qualify” for a reverse mortgage loan like you would a traditional home loan by means of credit score, income, etc..  Your home has to be owned free and clear or have a sufficient amount of equity attached to it.  Aging homeowners on fixed incomes consider this type of loan instead of selling the home to gain extra cash and to give them an extra monthly income to help make ends meet.  Others consider using this as a way to help with medical expenses or even nursing care.  Expenses that need to be covered, but there is not enough income to take out a traditional loan, that requires monthly payments to repay the loan.
Five Questions to Ask Before Considering a Reverse Mortgage Loan

  • Do you really need a reverse mortgage?  Are the needs you intend to meet really worth the high total cost of these loans?  Investing the money from these loans is an especially bad idea, because the loan is highly likely to cost more than you could safely earn. If anyone is trying to sell you something and recommending you use a reverse mortgage to pay for it, that’s generally a good indication that you don’t need it and shouldn’t be buying it.
  • Can you afford a reverse mortgage?  These loans are very expensive, and the amount you owe grows larger every month.  The younger you are when you take out a reverse mortgage, the more the compound interest will grow.  These loans can be especially costly if you sell and move just a few years after taking one out.
  • Can you afford to start using up your home equity now?  The more you use now, the less you will have later when you many need it more, for example, to pay for future emergencies, health care needs or everyday living expenses.  If you are not facing a financial emergency now, then consider postponing a reverse mortgage.
  • Do you have less costly options?  Do you have other financial resources that you could use instead of taking out a loan?  If you don’t and if you could easily make the monthly repayments on a home equity loan or home equity line of credit, these alternatives are much less costly than a reverse mortgage.  Many state and local governments offer very low-cost loans for paying your property taxes or making home repairs.  Have you seriously looked into the costs and benefits of selling your home and moving to a less expensive one?
  • Do you fully understand how these loans work?  Reverse mortgages are quite different from any other loans, and the risks to borrowers are unique.  Before considering one, you need to do your homework carefully and thoroughly.