Reverse Mortgages: How They Work, Their Benefits and Drawbacks
Senior reverse mortgages are different from traditional home loans in several ways. Before you decide to get a reverse mortgage, it’s a good idea to learn as much as you can about them; learn such things as how they work, their benefits and even their 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 are getting money from the bank, you increase your home’s debt as time goes on. At the same time, the equity in the home decreases.
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 don’t need to make any monthly repayments, you don’t need any type of income to qualify. You could have no income and still qualify for a reverse mortgage. Also, your credit history is of no 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:
How old you are
The current market rate
The home appraised value or the FHA’s reverse mortgage limit for your area
As a general rule, the older you are, the more expensive your home is and the lower the interest rates are, the more money you can borrow with a seniors reverse mortgage.
You need to remember that since you keep ownership of your home, you are still required to pay your real estate taxes, insurance, maintenance costs, etc.
Reverse Mortgage Benefits
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 won’t need any income to qualify. The lender is the making the payments.
You don’t need to make any repayments on a reverse mortgage
You can’t loose your house because you can’t 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 reverse mortgage for any thing you want.
The money your receive from a senior reverse mortgage is usually tax deductible
Most reverse home mortgages have no earnings limitations
Your Social Security and Medicare payments are usually not affected (Depends on your individual situation.)
Reverse Mortgage Drawbacks
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 cons you need to consider before applying for a reverse mortgage:
The majority of reverse mortgages have variable interest rates. Your interest 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 senior reverse mortgage. Banks may also charge servicing fees during the duration of the reverse mortgage. These fees are already included in the mortgage.
The interest paid on a reverse mortgage is not deductible in your income tax returns until the home mortgage is paid off (in part or whole.)
There is usually a less expensive solution to your financial problems ( a credit line, refinancing your present home mortgage, etc.)
To reduce some of these drawbacks, make sure you apply for your reverse mortgage through a trustworthy company who will educate you throughout the reverse mortgage process and beyond.
About the Author:
Before you get a Reverse Mortgage, make sure you learn all about them. You can look over many different educational articles at Seniors Reverse Mortgage.
