The most simplified explanation of a reverse mortgage is that it is a loan for people 62 years of age or older that uses the equity in their home as collateral. With a reverse mortgage, the borrower is allowed to convert some of the equity in the home to a cash amount. Reverse mortgages are a way for those over the age of 62 to borrow money against their home and have access to cash. It can be a good option for those who haven’t invested enough for their retirement. (For more tips on retirement planning, check out our list of the best online investing sites.)
The idea behind the reverse mortgage was to help older persons who may have limited income acquire enough cash for monthly expenses. However, the money can be used however the person sees fit. The term “reverse mortgage” was coined because it is an opposite process from a traditional mortgage. The lender will make payments to the borrower. The loan is not required to be repaid until the house is vacated. All property taxes and homeowner’s insurance must be kept current, but the loan does not need to be repaid, as long as the older person does not vacate the home.
Should I Get a Reverse Mortgage?
A reverse mortgage sounds like a good idea at its heart, however, financial reporting sources such as CNN and US News have been warning against these types of loans for years. Here are some of the downsides to consider.
1. High Fees
This is a loan; there will be fees. The fees attached to these loans are usually higher than the average for other loan types. The higher fees are due to higher risks for the lender, because the reverse mortgage is not based on income or credit score.
2. Higher Interest Rate
As the fees are typically higher, it would make sense that the interest rate is also elevated. This translates to less actual cash received after the paperwork is signed.
3. No Inheritance
One of the harsh realities of a reverse mortgage is the fact that the bank could take the house after the person vacates it. It is collateral for the loan; many older people who have cashed in on a reverse mortgage have found that their house is repossessed after they move out. The home does not go to the heirs of the estate.
4. Loan Repayment
After the elderly person moves out of the home, the loan must be repaid. As this is a loan for retirees, it is often the case that many elderly people do not have the means to pay back the loan after leaving the home.
While these reasons are sound reasons to avoid a reverse mortgage, a number of people still opt for the cash loan. The cash can be allocated month to month for living expenses for the elderly, and it can be reinvested to create more income. If the money is handled correctly, a reverse mortgage loan is a very good idea. Too often, however, it is not, and many elderly people are falling into deep debt through these loans.
If you are in serious debt and need some relief but don’t want to opt for a reverse mortgage, you can check out a debt relief service like Freedom Debt Relief. Here’s both our Freedom Debt Relief review and Accredited Debt Relief review to give you better idea of how debt relief services work.
If you are interested in a reverse mortgage, check out Quicken Loans for more info.