You may have seen the recent TV commercials with “The Golden Girls” star Rue McClanahan advertising reverse mortgages. What are these loans? Who is eligible? And what are the risks involved?
A reverse mortgage is a type of loan that is available to seniors who have a lot of equity in their homes, but little cash on hand. It is literally a reverse mortgage, in which the homeowner can access the equity locked up in their home through a special loan from the bank. This money is paid in monthly installments or all at once. There are no monthly costs to be paid by the borrower, and the loan is due only when the property is sold or the owner dies. At that time, all interest and fees associated with the loan must be paid in one lump sum.
For seniors who need money for everyday expenses like medications, bills, or travel funds, a reverse mortgage can be a great option.
Other mortgage loans are available, but they require monthly payments, which can be difficult for some seniors to pay. This is one of the reasons why a reverse mortgage may be a good option for some people; Not only can they free up some cash from your home equity, but they can do it without increasing your monthly expenses.
On the downside, because the money for this type of loan comes from home equity, a reverse mortgage can affect the amount of inheritance beneficiaries receive. When the property is sold (or at the time of the owner’s death), the bank recovers all the money owed to it and leaves what is left to the borrower. The more money taken out of a reverse mortgage, the less money will be left for the heirs of the estate. Fortunately, there is a limit to how much you can owe. When the property is sold, if the proceeds of the sale are less than the amount owed on the loan, the bank will eat up the difference.
To qualify for a reverse mortgage, the borrower must be 62 years of age or older, use the property as their primary residence, maintain their home in good repair, and must have paid off all or most of their mortgage. If there is an outstanding balance on the mortgage, it must be paid in full with funds from the new loan.
If possible, a better solution is to sell the property and downsize to a smaller house or apartment. This would allow the owner to live off the proceeds of the sale, without owing anyone anything. However, this is not a viable option for everyone, especially in a slow real estate market.
A reverse mortgage can bring great relief to seniors, but this type of financing is not the answer for everyone. The costs involved with this type of loan are quite high at the beginning, although the borrower will not be affected by it from month to month. If the homeowner does not plan to stay in the home for long, the costs of obtaining this type of loan may be too high to be practical. Some fees must be paid up front (using the loan money), and closing fees may be higher than with other types of financing. A homeowner should only consider this type of loan if he plans to stay in the home for a long time. If she is unsure of her plans, it may be a better idea to get a different type of mortgage loan or consider selling the property.
Because predatory lenders often target seniors, the government has made it mandatory for anyone interested in purchasing a reverse mortgage to speak with a qualified outside counselor. This will ensure that the borrower is doing what is best for them, including choosing a reputable lender to do business with.
