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The Pros And Cons Of A Reverse Mortgage |
Copyright 2006 Alvin Toh
To qualify for a reverse mortgage, the homeowner must have equity in his home and be over the age of 62. He can choose to receive funds from this mortgage as a fixed monthly payment, a lump sum, a line of credit or a combination of these. The mortgage will not be repaid until he dies, sells his home or moves out of his home permanently.
Reverse mortgage allows a homeowner to cash in on the equity of his home. He can use the funds for any purposes such as to pay for home improvements, medical costs, long term health care and vacations. Many older Americans are tapping into these funds to make ends meet. When social security payments, savings and pensions are not enough to fund living expenses, reverse mortgage can help secure the funds a homeowner needs.
Funds from a reverse mortgage are not taxable income and have no income restrictions. So, those who are on social security or Medicare benefits are not affected. Unlike regular loans and mortgages, there is no income check when applying for this type of mortgage as no monthly repayments are required. Effectively, you can still qualify for a reverse mortgage even if you have no income.
Despite the various benefits of a reverse mortgage, it is crucial to consider its drawbacks prior to securing one.
When the homeowner dies or permanently moves out of his home, the home will need to be sold in order to pay off the mortgage. The mortgage will be due at this time, in a lump sum. If the homeowner or his inheritors want to keep the home, they would have to make payment on the home within a year of the mortgage becoming due. Reverse mortgage is not the right option for a homeowner who does not wish to sell his home.
There are quite substantial fees involved in a reverse mortgage. This type of mortgage is generally more expensive than a regular mortgage or loan. In the beginning, the homeowner is expected to pay mortgage insurance premium, origination fee, appraisal fee and closing costs. In short, a $200,000 reverse mortgage may have $10,000 worth of fees involved with it. The fees are deducted from the loan prior to the funds being released to the homeowner. There may be additional servicing fees to be incurred during the term of the mortgage.
If the homeowner still holds a mortgage on the home when he seeks out the reverse mortgage, the mortgage will need to be paid off in full with the funds from the reverse mortgage and/or personal funds as needed.
The biggest drawback to a reverse mortgage is its upfront costs. Before you decide on a reverse mortgage, determine if there is another type of loan that can fulfill your financial needs but at lower costs. Shop around to compare various reverse mortgages from different lenders. There are some state and local governments that offer lower fees on certain types of reverse mortgage.
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