Since the introduction of the idea in the late 1980s, more than 660,000 reverse mortgages have been approved in the United States. While this is a large number, it’s nothing compared to the nearly $1 trillion dollars of mortgages originated in a given year. Although reverse mortgages form a very small part of overall mortgage options sought after by Americans, there is an increasing amount of advertising dollars being committed to these products.
What is a reverse mortgage? Who is an ideal candidate for this product, and what are the benefits and pitfalls of applying for and later closing this product? We have the answers for you right here.
What is a Reverse Mortgage?
Think of a reverse mortgage as a mirror image of a traditional mortgage. In a traditional mortgage situation, you pay off a mortgage so that you own the home outright. In a reverse mortgage, the equity value of your home (the amount of the home you actually own) is turned into cash that you can use to pay off other debts, cover medical expenses and make needed repairs or additions to your home. In other words, you make no payments on your mortgage until something happens that makes the loan due. Instead of making payments you receive payments.
Is It A Good Option?
A reverse mortgage is a good idea because repayment of your loan only starts if you sell your home, move, or pass away. If you decide on a reverse mortgage, you will need to make regular payments toward property tax and any homeowner’s insurance as not paying these will cause you to default on your reverse mortgage.
While a reverse mortgage is a good option for those people who are 62 years and above and need a ready flow of cash stemming from their equity, they aren’t right for all homeowners over 62.
The Cons
Reverse mortgages tend to be relatively expensive because of the upfront fees that need to be paid. This includes loan origination fees, mortgage insurance payments and closing costs. A regular reverse mortgage by Federal Housing Administration’s (FHA) HECM (Home Equity Conversion Mortgage) charges an upfront fee of 2 percent of mortgage insurance premium.
Another drawback is that you may be eating into the inheritance that you had wished to leave for your heirs since the home will have to be sold to repay the note or regular payments will have to commence.
Tips
- Before applying for a reverse mortgage, spend some time thinking about whether you need it at all. Many aggressive salesmen will try to tout reverse mortgages as the next best thing for ALL senior citizens. This need not be true for you.
- Speak with a reverse mortgage counselor so that you have a better idea about the whole issue. Knowledge is power.
- There might be other less expensive options available to you. If you think you will be able to pay off monthly payments, a home equity loan may be a more cost friendly option for you.
- If a reverse mortgage is what you want, look for an authentic lender. FHA Housing and Urban Development (HUD) reverse mortgages seem to be the most reliable ones available.
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Bottom Line
Reverse mortgages are often good for senior citizens who need income in their later years although like all loans, it isn’t right for all homeowners over the age of 62.
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