Reverse Mortgages: Understanding The Pros And Cons
When deciding whether or not a reverse mortgage is right for you
, it is important to weight the costs against the benefits. In order to do so, it is necessary to understand exactly what a reverse mortgage is, as well as how it will affect you in the short and long term.A reverse mortgage, also known as a Home Equity Conversion Mortgage or HECM, is a mortgage option that enables homeowners age 62 and older to liquidate the equity in their home in the form of a rolling line of credit, tax-free monthly payments made to the homeowner, a lump sum, or a combination of any of the three.
The holder of a reverse mortgage receives the amount they are qualified for over a time frame of his or her specification, and, most importantly, is not required to make any payments as long as he, she, or they continue to live in the house.
The Pros
The monthly installments that certain reverse mortgage plans offer may allow seniors to supplement a fixed income with additional funds. Because no payments are due as long as at least one of the original mortgage-holders lives in the house, it can never be foreclosed upon or defaulted.
Lump sum payments may be arranged in order for holders to meet unexpected medical costs, pay for maintenance on the home, or even to fund vacations or trusts for family members.
This is also a convenient way for them to consolidate other debt and keep bills current, while maintaining the equity in their home.
There is no title transfer in a reverse mortgage; the lender places a lien on the property, and the lender can never take the property.
A reverse mortgage also gives more control to its holders insofar as the homeowners decide how much equity to use for themselves and how much to leave to their heirs.
Because reverse mortgages were first designed by the government, they carry regulations that make them fairer and better protected against predatory lending. These regulations also require third-party counseling, and information regarding the transaction is highly disclosed.
The ideal candidate is over 62, has no intention of moving in the near future, nor of selling the home, will not be passing the home on to their heirs, and wishes to have a little extra money to supplement their income, fixed or not.
The Cons
Because the payback is so long-term, reverse mortgages tend to carry with them higher interest rates. And while reverse mortgage lenders wont allow borrows to extract the full equity of their home, paying them back often requires sale of the home, the lender giving the leftovers, after interest and fees, back to the homeowner or his heirs. Higher interest rates mean there might not be anything to give back after the sale.
This also means that if a homeowner dies and his heirs wish to keep the house in the family, the heirs are responsible for paying back that money to remove the lien at the time of the reverse mortgage holders death.
Also, for seniors who are already financially strapped, a reverse mortgage is going to require some upfront costs and fees that they should be prepared to pay.
Furthermore, as expected, a reverse mortgage gradually lowers the equity in your home. While this might not always be disadvantageous, homeowners should be prepared to accept this trade-off.
Seniors who have cash flow and are not on a fixed income, but need additional money for personal use may be better off taking a traditional home equity loan with a lower interest rate. This option requires payments, but yields less in interest long-term.
If a reverse mortgage holder plans to sell the house and move, the lender must be paid before the money from the sale can be credited toward a new home.
How to Weigh the Pros and Cons
A reverse mortgage is not free money, but simply an alternative to traditional home equity loans, meant to make it easier for seniors to keep their homes.
Interest rates are adjusted according to the age of the mortgage holder. Therefore, a couple over the age of 62 may want to wait a few years in order to secure lower interest rates.
Before enrolling in a reverse mortgage program, or even researching them, decide what it is you want. What are your plans for the next 5, 10, and 15 years? Do you want to sell your house? Does it need repairs? Do you foresee or wish to plan for any upcoming medical expenses?
Discuss the options of a reverse mortgage with your heirs. Keep in mind that should you pass away while holding a reverse mortgage, your estate will lose whatever you may owe on it.
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