Reverse Mortgages - Good Deal or Not?
Barry Waxller
What is the one thing you read over and over? Buy a home! The advice makes sense in this case as a home is a good long term investment. The question, however, is how do you get the money out when you need it?
Most people are familiar with a forward mortgage. You borrow money from a lender to pay for a home. You then pay back the loan on a schedule over a number of years. The reverse mortgage is similar to this, but the money is going the other way.
Reverse mortgages, around since the 1960's, have been making a comeback in recent years. As the basic population of the country ages, the question of converting equity to cash that can be used is becoming more and more of an issue.
The reverse mortgage is legally restricted to a certain class of homeowners. In fact, you have to be at least 62 years old before you can even think about applying for one. Assuming you meet this requirement, everything flips.
In a reverse mortgage, you have equity in your home and a lender is willing to trade you cash now for a chunk of that equity. Yes, you are essentially selling the property to the lender, which is making payments on it over time.
The nature of the payments, of course, is unique. You can have the lender make monthly payments to you much like you did to your original mortage lender. Alternatively, you can ask for a lump sum payment.
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.
With the massive amount of advertising for reverse mortgages available out there, you might think there are no negatives to the loan. In truth, there are more than a few and you really need to take them into account. Most reverse mortgages are not good deals.
The first problem with the reverse mortgage is your heirs. If you hope to leave them with something, you need to realize the reverse mortgage lender is going to take a large chunk of the equity in your home when you sell it or pass on.
The second problem is the loan is expensive. You can spend tens of thousands of dollars getting into the loan. The interest rate on the amount you owe is also higher than forward mortgages, often two to three points higher.
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 is a financial planner who writes about http://www.ufcamerica.com/ financial planning for UFCAmerica.com.
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