When Should You Decide Upon A Reverse Mortgage?

By Author: Scott Staudt
Total Articles: 91
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The idea of a reverse mortgage sounds appealing, but there are many parts to it that many people do not understand. If you are thinking about one, make sure you fully understand reverse mortgages.

The first question to ask is What is a Reverse Mortgage? This type of mortgage, developed by the U.S. Department of Housing and Urban Development is a loan that allows homeowners over 62 years of age who reside in the home to convert some of the equity in their homes to cash. Since a lot of older people own their homes outright, they may have a lot of equity balance. Using the reverse mortgage, they can draw against this balance on a routine basis and only have to pay it back when the house is sold.

Unlike a mortgage with a monthly payment, the loan is paid from the proceeds of the sale. This puts an automatic limitation on the loan in that the borrower has to have little to no debt on the house in order to withdraw against the equity.

Homeowners over 62 may be asset rich in that they own a house, but cash poor, and now they can use the house to pay for items such as living expenses or medical bills. For ...
... many elderly people, who would not be eligible for a new refinancing or equity line of credit because of income limitations, it can be an ideal solution.

Before anyone makes the decision about a reverse equity loan, they should make sure that one of the other types of loans such as a home equity loan or home equity line of credit would not be cheaper.

The borrower should be wary of additional fees, such as the insurance the lender will require to guarantee against excess funds being withdrawn. You also still have closing costs, but they are treated as further draws and added to the balance.

This is why it is critical to understand all of the costs involved in this kind of mortgage. If the loan is only going to be for a few years, these fees will not be amortized fully, making the loan very expensive.
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