Reverse Mortgage: A Loan That Pays YOU!
Reverse mortgages can be a real boon to seniors looking for a way to tap into their home’s existing equity, but they also typically come with high fees, high interest rates and other drawbacks that may make them less than ideal for some borrowers. The primary advantage of reverse mortgages – and it’s a big one – is that seniors who’ve spent years building up the equity they have in their homes can use the reverse mortgage to draw money from their equity value without having to sell their homes. That can be a huge help to many seniors on low, fixed incomes. In essence, your home will start paying YOU.
Reverse mortgages are some of the most regulated – and complicated – loan products available, and to understand how they work and what types of loans and loan options are available, the Federal Trade Commission (FTC) has devoted a whole section of their website to help consumers understand them. If you’re considering a reverse mortgage, this article will offer a brief rundown of some of the most common advantages and disadvantages.
First, the advantages:
- You can receive the money in the way that suits your needs: as a lump sum, a line of credit or as a fixed monthly amount, and sometimes, as a combination of these.
- Loan proceeds usually don’t affect Medicare or Social Security benefits.
- Usually there are no income requirements.
- You keep the title to your home.
- Repayment does not begin until the borrower dies, sells the home or no longer uses the home as a primary residence.
- Some programs allow the borrower to live in a nursing home for up to 12 months before the loan comes due.
- You’ll never owe more than your home is worth, even if the amount you receive in monthly payments exceeds the actual value of your home.
And, the disadvantages:
- Unlike Medicare and Social Security, loan proceeds may affect eligibility for Medicaid.
- Closing costs and origination fees can be high.
- You’re required to participate in a free financial counseling program before applying for the loan (this could be seen as an advantage to many).
- Some loans have ongoing service fees which must be paid for the life of the loan.
- Most reverse mortgages have adjustable rates that are tied to short-term indexes.
- You may end up with little left to your heirs.
- The loan may come due if the borrower fails to pay taxes, maintenance costs, homeowners insurance or other expenses.
A reverse mortgage can be an attractive product for seniors who want to stay in their homes but need the equity to pay bills or increase their standard of living. But they are not without their risks and they can be difficult to understand. Take the time to learn about them and develop a list of questions you can discuss with the loan counselor. Only when you’re sure it’s a good fit for you should you sign on the dotted line.