The Reverse Mortgage: Is it Your Friend or Foe?
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This type of mortgage is unique among other types of home loans because it does not require the borrower to make monthly payments on his or her mortgage. By utilizing the equity in their home, borrowers may actually be eligible to receive money from their lender.
To qualify for a reverse mortgage, the homeowner must be at least 62 years old and the home that is being financed must be the homeowner’s primary residence. The total amount homeowners can receive depends upon their age, current interest rates and the amount of equity that is available in the home.
What are the Advantages?
Because a reverse mortgage does not require monthly payments, homeowners have more money available to pay for other expenses. And if a homeowner is eligible to receive cash, that money can be used to supplement his or her income or pay for anything the homeowner wishes.
Common uses for the money borrowers receive include paying off other types of debt, making home repairs, and paying for costly medical expenses. In order to suit their unique situation, borrowers have the option of choosing how they receive their money.
Borrowers do not have to repay the loan until they sell the house or no longer occupy the home for any reason. The FHA guarantees that homeowners will never owe more than the value of their home once the loan is due to be repaid, even if the amount due exceeds the home’s value. It is important to note, however, that if the real estate taxes or insurance become delinquent or the home falls into disrepair, the homeowner may be required to repay the balance in full.
Because there are no monthly payments, a reverse mortgage has no income or credit requirements. This allows more homeowners to be eligible for this type of financing.
What are the Disadvantages?
The disadvantage of this type of mortgage is that is that homeowners are liquidating the equity in their home. This reduces the amount of equity available in the home for future use. Because there are no monthly payments, homeowners end up accumulating debt over time, rather than reducing it.
Homeowners can best reap the benefits of a reverse mortgage if they plan on living in the same house for an extended period of time. If a homeowners plans on leaving his or her home within the next 2-3 years, a reverse mortgage is mostly likely not the best option for them.
Like any mortgage, reverse mortgages have closing costs. While these costs do not have to be paid out of pocket, homeowners must decide if they think the benefits of a reverse mortgage justify the fees.
A reverse mortgage can also possibly affect a borrower’s ability to receive certain need-based assistance from the government, but this varies by location and situation.
Like anything else, a reverse mortgage has its advantages and its disadvantages. A reverse mortgage specialist and financial counseling can help you decide if this is the right option for you.
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