How a reverse mortgage can work for you
You may have seen the recent TV commercials featuring Golden Girls star Rue McClanahan promoting reverse mortgages. What are these credits? Who is eligible? And what are the associated risks?
A reverse mortgage is a type of loan that is available to senior citizens who have a lot of equity in their homes but little cash. It’s literally a reverse mortgage where a homeowner has access to the equity locked in their home through a special loan from the bank. This money is paid in monthly installments or all at once. There are no monthly costs to the borrower, and the loan only becomes due when the property is sold or when the homeowner dies. At that time, all interest and fees associated with the loan are due in one lump sum.
For seniors who need money for everyday expenses such as medicine, bills or travel funds, a reverse mortgage can be a great option.
Other home loans are available, but they require monthly payments, which may be difficult for some seniors to afford. This is one reason why a reverse mortgage may be right for some people; not only can they free up some money from their home equity, but they can do so without adding to their monthly expenses.
On the other hand, since the money for this type of loan comes from the equity of the home, the reverse mortgage can affect the amount of inheritance the beneficiaries will receive. When the property is sold (or at the time of the owner’s death), the bank takes back all the money owed, leaving what is left with the borrower. The more money taken out in a reverse mortgage, the less money will be left for the heirs of the estate. Fortunately, there is a limit to how much can be owed. When the property is sold, if the sale proceeds are less than the amount owed on the loan, the bank will eat the difference.
To qualify for a reverse mortgage, the borrower must be 62 or older, use the property as their primary residence, keep their home in good repair, and must have paid off all or most of their mortgage. If there is an outstanding balance on the mortgage, it must be paid in full with funds from the new loan.
If possible, a better solution is to sell the property and downsize to a smaller home or apartment. This will allow the owner to live off the proceeds of the sale without owing anyone anything. However, this is not a viable option for everyone, especially in a slow real estate market.
A reverse mortgage can bring great relief to seniors, but this type of financing is not the solution for everyone. The costs associated with this type of loan are quite high initially, although the borrower will not be affected by this on a month-to-month basis. If the homeowner does not plan to stay in the house very long, the cost of taking out this type of loan may be too high to be practical. Some fees must be paid upfront (using loan money), and closing fees can be higher than with other types of financing. A homeowner should only consider this type of loan if they plan to stay in the house for a long time. If she is at all unsure about her plans, she may be better off taking out another type of home loan or looking into selling the property.
Because predatory lenders often target the elderly, the government has made it mandatory for anyone interested in acquiring a reverse mortgage to speak with a qualified third-party adviser. This will ensure that the borrower is doing what is in their best interest, including choosing a reputable lender to do business with.
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