A reverse mortgage is only available for persons 62 years and older. The reverse mortgage is a loan that is placed on the equity in a home. It is referred to as ‘reverse’ because it is not like normal mortgages where the homeowner receives a lump sum and repays the lender over many years for the debt. In a reverse mortgage, the lender releases money to the homeowner for the life of the mortgage and the loan amount increases as time goes by.
Reverse mortgages are a great way for older people to get some extra money by using the equity in their home. They are able to use this money anyway they see fit, but there are some disadvantages to getting a reverse mortgage.
First, you have to keep in mind that banks are out to make money. They are taking a risk by giving you a loan on your home, in turn they will charge you interest on your loan. On top of the loan interest there will be fees you have to pay, such as house appraisal and an organization fee. Usually these fees are added to the loan so you wont have to pay until you leave your home.
Second, you are usually required to live at the house that you get the reverse mortgage on. A lot of contracts will have a certain number of days or months that you can live elsewhere before you are expected to pay the loan and interest back. This sounds great if you are planning on living in your home until you pass away, but think if you get sick and have to spend 18 months in the hospital. You may come out and discover that you have lost your house because you weren't living there while you were in the hospital. However, this is also a stipulation with most conventional mortgages but is very rarely enforced.
Third, you must own your home or have very little left to pay on the current mortgage. You have to have enough equity in the house for the banks to take a chance and lend you money on the property. If you do still owe on your house (you do not own it) you may be able to get a reverse mortgage but you will have to use the money you get to pay it off. On that note, you are also required to pay any taxes on your home as well as insurance.
The last disadvantage of a reverse mortgage is that you have to keep your home looking good and in repair. If the bank decides to stop by and review if you are keeping up with your end of the contract and the house is in major disrepair, the lender could revoke your loan and you would be responsible for paying back the loan and interest, again this is one of those things that is possible but unlikely, but you should keep it in mind.
All in all, reverse mortgages are a great way for seniors to get some extra cash that can be used for anything like a vacation or medical expenses. Always keep in mind that you are not getting free money. Banks are in the business of making money. If you have any questions you should talk to a financial advisor or accountant.
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