Is a Reverse Mortgage Right for Most Seniors?

August 20th, 2012

Reverse mortgages often are marketed as a way for seniors to get extra cash.  While they can be a godsend to some, they also come with negatives.  Reverse mortgages are available only to homeowners age 62 or above with significant home equity.   Thus, a senior isn’t likely to qualify for a reverse mortgage if the home already is subject to substantial mortgage debt.   On the other hand, a valuable home with little or no mortgage debt can be a good candidate for a reverse mortgage.

To take out a reverse mortgage, a senior homeowner applies for a loan and if approved proceeds to a loan closing.  The senior can choose a reverse mortgage that provides a lump sum, income stream, or credit line, which the senior can spend as he chooses, but someday the senior or his/her heirs will have to pay the piper.  No payments are due on a reverse mortgage while it remains the borrower’s home but when the senior dies or moves out, the loan comes due.

Reverse mortgages come with drawbacks.  Set up costs can be substantial.  With the borrower paying origination fees, mortgage insurance, title insurance, appraisal fees, attorney fees and other costs, a reverse mortgage can be an expensive way to obtain cash.  A reverse mortgage incurs typical mortgage costs like interest, but the no payments are due until the homeonwer dies or otherwise vacates the home.  Thus, a reverse mortgage essentially sells some of a senior homeowner’s equity for an upfront cash agent.  If the homeowner lives in the home for life, the homeowner never need pay against the reverse mortgage, but at the homeowner’s death, the home must be sold to repay the reverse mortgage principal plus interest and other costs.

Is a reverse mortgage the panacea that some ads portray?  Obviously, not, but it can be a good option for older homeowners who need cash but don’t want to have to repay debt while still living in the home.  Because a reverse mortgage is a legal arrangement involving most folks’ primary asset, you should consult an elder law attorney before entering into a reverse mortgage.

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