Are Reverse Mortgages Good for Your Finances?

By: Barry Waxller

A basic staple of the financial world is you, I and everyone should buy a home. Why? Well, it is well established that a home is good investment over time, one you can use to fund your retirement years.

If you own a home, you have been in a forward mortgage and you know how it works. You borrow money for a home and then pay it back over a set schedule, often for a full thirty years.

The reverse mortgage is touted as a revolutionary new financial product. This is not entirely or even remotely true. This financial product has been around since the 1960s.

The reverse mortgage is one of the rare financial tools that allows for age bias. In fact, there is a mandatory age limit and it is legal. Simply put, you must be 62 year of age or older to apply for a mortgage.

The reverse mortgage works the opposite of a traditional mortage, but it can be hard to get your head around the concept. Essentially, the lender buys the equity in the home from you by making payments to you.

So, what is the deal with the payments? Well, it depends on the lender. In some situations, you can receive a lump sum payment for your equity. In others, you can get monthly payments from the lender.

The biggest selling point of the reverse mortgage is the lender payback. Simply put, you don't pay the lender back. They recover their money when you pass away or the home is sold. Not bad, eh?

With the massive amount of advertising for reverse mortgages available out there, you might think there are no negatives to the loan. In truth, there are more than a few and you really need to take them into account. Most reverse mortgages are not good deals.

If you have heirs you wish to take care of, the reverse mortgage can be a nightmare. Remember, you are selling your equity in the home. When you pass away, this often results in little being left for your heirs.

The cost of the reverse mortgage is another big issue. Simply put, the fees are outrageous in most cases. They often run up in the tens of thousands of dollars. The interest rate on the accruing debt is also going to be higher than normal loan rates.

Ultimately, the issue of whether the reverse mortgage is a good idea is very controversial. Opinions differ, but most feel these are not good loans when compared to the many options available and you should explore those options.