Making Sense of Reverse Mortgages

Many senior citizens purchased their home while in their 20s or 30s. They faithfully made every mortgage payment for 30 years, and once they hit the age of retirement, they own their home free and clear. Now that they are in their golden years, they may be sitting on years of accrued equity as well as a home that has probably greatly appreciated since they purchased it 30 years ago. For some, they choose to tap into the value of their home with a reverse mortgage.

With a reverse mortgage, a home owner (that's at least 62 years of age) can convert the worth of their home into cash. The requirements for a reverse mortgage are minimal, and standards such as credit and income usually do not apply in this situation. Furthermore, you may even qualify for a reverse mortgage if you do not own your home free and clear, depending on the equity and value of your home. Although most people only think of single family homes when it comes to mortgages, you may also get a reverse mortgage on properties such as manufactured homes that were built after June 1976, condominiums, townhouses as well as 2-4 unit properties. The income from a reverse mortgage may not affect your regular Social Security or Medicare benefits, but it could impact your eligibility for Medicaid.

The home owner can choose to stay in their home until their death, or until they decide to permanently move out of the home. It is a loan against the property that doesn't have to be paid back as long as the home owner (or any co-owner) lives there, and the you do not have to make monthly payments on the loan. As a matter of fact, the home owner may be able to choose to receive the loan payments on a monthly basis, so that means the lender would be making payments to you, instead of you making payments to them. Some lenders offer various other payment options. You may want to receive a lump sum payment from the lender. Or perhaps you'd prefer a line of credit that allows you to draw on the loan proceeds at your discretion and choosing. There are no restrictions on the money you receive from a reverse mortgage, and you can use the proceeds for anything you desire. Some choose to take the vacation of a lifetime, some may choose to buy that luxury car they've always dreamed of. Others find that they need to use the money for necessities including their daily living expenses, or modifying their home to accommodate wheel chairs or other adaptive devices. Still others use it to relieve their debt load or to make payments on their property taxes, as well as preventing foreclosure.

While all of this may sound wonderful, there is a serious downside to reverse mortgages that should be seriously considered. When you are no longer in the home, then the loan has to be repaid when there are no more survivors living in the home as a principal residence. This generally means that the lender will own your home and your children or heirs won't be able to inherit your home. You will also remain liable for costs such as insurance, maintenance, utilities, fuel, and property taxes. Also, the balance on a reverse mortgage tends to increase over time because interest is charged on the outstanding balance. This interest is generally NOT tax deductible and it is added to the amount you owe each month, increasing the total debt owed to the lender. This may use up every bit of the equity in your house, leaving fewer assets your heirs may inherit.

Although a reverse mortgage may sound good, everyone should look at every option available to them before they choose this route. There are other loans available or you may find that you have more resources available than you previously thought. Whatever your decision, make sure you talk it over with a family member, a friend or a trusted confidant before you commit to anything in writing.