The great American Dream is to own a home. After all, it is a great nest egg investment. When you hit your retirement years, however, how do you turn the equity in the home into money you can use? Many suggest using a reverse mortgage.
The traditional mortgage can be described simply. The lender issues you a bulk sum of money to buy a property. In exchange, you agree to pay back the sum plus interest over a lengthy period of 15 or 30 years.
Most people view reverse mortgages as new financial tools. In truth, they have been around for over 50 years. As more people try to figure out how to access the equity in their home, the reverse mortgage is seeing a renaissance.
The reverse mortgage is one of the rare financial tools that allows for age bias. In fact, there is a mandatory age limit and it is legal. Simply put, you must be 62 year of age or older to apply for a mortgage.
The reverse mortgage works the opposite of a traditional mortage, but it can be hard to get your head around the concept. Essentially, the lender buys the equity in the home from you by making payments to you.
Show me the money. That was the refrain of a famous movie with Tom Cruise. With reverse mortgages, you can get it in one of two ways. The first is as a lump sum payment. The second is in the form of monthly payments.
The good news is you need not pay back the money the lender is paying you. Instead, the lender will recover the money when the home is eventually sold. The bad news is you are limited to selling only fifty percent of the equity you have in your home.
So, are there any negatives to this equity converting financial product? Oh, yes there are. Remember, marketing efforts are all about emphasizing the positive while ignoring the negatives.
Sometimes it is hard to see the forest for the trees. With the reverse mortgage, this has to do with the issue of what is left at the end of the process. Simply put, the lender is going to take a large chunk of the home, not your heirs.
The cost of the reverse mortgage is another big issue. Simply put, the fees are outrageous in most cases. They often run up in the tens of thousands of dollars. The interest rate on the accruing debt is also going to be higher than normal loan rates.
At the end of the day, most financial professionals view reverse mortgages as a less than stellar option for seniors to access the equity in their homes. If you are faced with this problem, make sure to explore all options available to you with a financial consultant.
Barry Waxler alerts consumers to the disadvantages of a reverse mortgage at UFCAmerica.com. Don't reprint this exact article. Instead, reprint a free unique content version of this same article.
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