The media is rife these days with advertisements encouraging people to apply for reverse mortgages. Viewers are encouraged to take advantage of the opportunity promptly so they can put their financial worries aside and start doing all the things they enjoy.
What Is A Reverse Mortgage?
When homeowners obtain a mortgage to purchase a home, they make payments to a lender. Each payment gives them ownership, or equity, in their home. If homeowners obtain a reverse mortgage, a lender pays them money. The money can be a lump sum or a series of payments. The funds can generally be used for whatever the homeowner desires, including paying off an existing standard mortgage. Simply put, a reverse mortgage allows homeowners to have immediate use of the equity in their home, without first selling it. The amount received depends on age, appraised value of the home, interest rates, and governmental loan limits.
Who Is Eligible?
Reverse mortgages are available only to homeowners who are at least 62 years old. They may still be paying off a standard mortgage, but they can’t owe much on it. The property must be the principal residence of the homeowners, who must be able to prove that they can pay for home ownership expenses, such as maintenance, insurance, and taxes. Most lenders require an evaluation from a debt counselor as a condition for approval.
How Is It Paid Back?
Funds from a reverse mortgage are not repaid until the homeowner sells the home, moves out permanently, or dies. The lender is paid from the proceeds of the sale or from the estate. If the value of the home is greater than the amount owed, the owner or estate keeps the excess. If the value is less than the amount owed, there is no liability to the owner or estate. The lender applies to the federal government for reimbursement of the loss. The lender may not seize any other assets or property of the homeowner.
What Are The Advantages Of Reverse Mortgages?
Reverse mortgages have many advantages. Unlike standard mortgages, the homeowner’s credit rating or income is not a factor in determining eligibility. Any amounts received are generally not taxable, and don’t affect most retirement income benefits. Homeowners retain ownership of their property and continue to live in their homes without making payments to the lender.
What Are The Disadvantages?
Most of the disadvantages of reverse mortgages are financial. Lenders are allowed to charge myriad fees, including origination and servicing fees, mortgage insurance premiums, and interest. There are also amounts paid to third parties, such as recording fees, surveys, inspections, title searches, and the like. Each and every expense is borne by the homeowner, significantly cutting the proceeds. Interest rates can vary significantly over the lifetime of the loan, and the interest is not tax deductible until the loan is repaid.
Homeowners considering reverse mortgages must do due diligence in choosing a lender, and are well–advised to read the fine print very carefully. Many financial professionals recommend obtaining a reverse mortgage as the last resort rather the first choice when money is needed.