The reverse mortgage facts you need to know now
Em here today.
Since we’re on a bit of a roll with the mortgage posts, it seems like a good time to examine a special type of mortgage that’s been getting a lot of media attention lately: reverse mortgages.
Are these a financial fairytale, or a dastardly debt drainer? I’ve done some investigating for you, and these are the reverse mortgage facts you need to know now.
What is a reverse mortgage?
There is some great info over at reversemortgage.org, but let me simplify it for you.
A reverse mortgage is a home loan for people who have lots of equity in their home. You convert the equity into cash.
In the usual situation, you borrow money for your house and pay back the bank (or whoever lent you the money. With a reverse mortgage, this process is reversed: the bank pays the homeowner.
These mortgages are available for older adults, generally aged 60+ (62 in the USA). The idea of the reverse mortgage is the payments you recieve help you finance the life you want to live, whether it be to help get by on a retirement income, or whatever reason you like.
The homeowner does not have to pay any of the reverse mortgage back until they sell the house (or pass away).
Freeing up some of the equity in your home to buy other things can sound like a great idea, especially if your house has gone up in value since you bought it. But is it?
What are the advantages?
- Possibility of freeing up cash without having to change much about your life as it is. This can help people who might not be able to free up any cash otherwise.
- Property prices most often go up, which can offset the interest costs.
- It can be an option to help you stay in your home if expenses arise that you might otherwise have difficulty meeting.
- Usually, you won’t be allowed to owe more than the value of your house, so if you pass away, you won’t be leaving your family with debt (you just won’t be leaving them your house!)
What are the pitfalls?
- Interest really is the major problem here. Since you are constantly receiving payment and not making payments, interest builds up very quickly (and the rate is often pretty high). This is also known as compound interest, and what initially starts off as a small sounding loan can end up being very large.
- If house prices slump, you’re in trouble.
- Fees for reverse mortgages are often high.
- There can be a temptation to use the newly accessible money in ways that do not end up benefiting the mortgagee. I have heard of people taking on reverse mortgages to free up funds to make investments. Those investments have then failed, and they have been left with just a loan.
- These monetary drawbacks mean reverse mortgages are probably only suitable for a small number of people.
After doing this research on reverse mortgages, I think they’re something to be wary of. But they could be something that is worthwhile and liberating for the right people, in the right circumstances, with the right financial advice. Before taking one out, think very carefully if it really is the right thing for you or not.