Reverse Mortgage: How it Works, Its Benefits and Drawbacks

By: Igor Buces

A seniors reverse mortgage is different from a traditional home loan in several ways. Before applying for one, it's important for you to learn how they work and what are its main benefits and drawbacks.

With a reverse mortgage, you never have to make monthly repayments for as long as you live in your home. As a matter of fact, the opposite occurs: the lender pays you money. You can get money from a bank when you have a reverse mortgage in one of three different ways: a lump sum, a line of credit or monthly payments.

Because you get payments from the lender, the debt in your home increases as time goes by and you get more money from the loan. At the same time, the equity in your house decreases as you get those payments.

When your senior reverse mortgage becomes due - either because you move out of the house or you pass away - the debt in your home many be very large, and the equity very small. If you have received a lot of money from the loan, there may be no equity left at the end of the mortgage. However, you can never owe more money than your home is worth.

Since you won't make any monthly repayments, you don't need any income to qualify for the loan. You may have no income and still qualify for a reverse home mortgage. Also, your credit history is of none or little concern.

The only requirements you must fulfill are that you are 62 years old, you live in the house and that there is enough equity in the home.

The amount of money you can borrow depends on three factors:

Your age

The current market interest rate

Your home estimated value or the FHA's mortgage limit for the area where you live

In general, the older you are, the bigger the appraised value of the home and the lower the interest rates, the more money you can borrow with a reverse mortgage.

It is important for you to remember that since you keep ownership of the house, you are still required to pay real estate taxes, insurance and general maintenance costs.

Reverse Mortgage Pros

There are many benefits associated to a reverse mortgage. These are some of the biggest:

You can stay in your home for as long as you want. You are not obligated to leave your home.

You don't need a monthly income to qualify. The bank is the one paying you monthly payments.

You don't have to make any payments on a reverse home mortgage

You can't loose your home because you aren't able to make mortgage payments

You can never be thrown out of your home for as long as you stay living in it. However, you still need to make real estate, insurance and maintenance payments.

You can use the money from the seniors reverse mortgage for any purpose you want

The funds are usually tax deductible

Most reverse mortgages have no income limitations

Your Social Security and Medicare payments are usually not affected (Depends on your individual situation.)

Reverse Mortgage Cons

As with any other type of mortgage, reverse mortgages have some drawbacks to using them. Of course, many of them are only potential and depending on your individual situation. Nevertheless, it's a good idea for you to know about these drawbacks before choosing a reverse mortgage.

These are some of the facts you need to consider before choosing a reverse mortgage:

Almost all reverse mortgages have variable interest rates. Your rates will change as the market changes.

Since reverse mortgages work by decreasing the equity in your home, you can use up most of the equity, leaving little money left for you and your heirs. However, a "non-recourse" clause found in most reverse home loans prevents either you or your heirs from owing more money than your home is sold forth.

Since you keep ownership of the home, you are still responsible for real estate taxes, insurance and maintenance costs.

Most lenders charge origination fees and other closing costs for a reverse mortgage. Lenders also may charge servicing fees during the duration of the home mortgage. These fees are already included in the mortgage.

The interest on a reverse mortgage is not deductible in your income tax returns until the loan is paid off (in part or whole.)

There is usually a cheaper solution to your financial problems (refinancing, credit line, etc.)

To make sure you get a good deal, get a reverse mortgage using a trusted lender and a mortgage broker specializing in reverse mortgages. A good reverse mortgage broker will educate you throughout the process.

Article Source: http://www.retirementlivingarticledirectory.com

Before you get a Reverse Mortgage, make sure you learn all about them. You can look over many different informative articles at Senior Reverse Mortgage.

Please Rate this Article

Not yet Rated