You have likely seen the commercials on television about reverse mortgages. A reverse mortgage is a loan available to home owners or home buyers over the age of 62. It enables them to access a portion of the subject home’s equity. With a reverse mortgage, home owners can draw the mortgage principal in a lump sum, by receiving monthly payments over a specific term or over their lifetimes, as a revolving line of credit or a combination of both.
With a conventional mortgage, a homeowner makes monthly payments to the lender, which in turn increases the equity with by the amount of the principal that was applied and when the mortgage is paid in full the homeowner then owns the property. With a reverse mortgage, a homeowner can make payments towards the mortgage, but is not under an obligation to. The line of credit that the homeowner receives is like a revolving credit line, so if a payment is made towards reduction of the line of credit it increases the available credit by the same amount. However, interest that accrues is added to the mortgage balance.
The loan comes due when the borrower sells the house, dies, fails to keep the taxes or insurance current, or moves out of the house for more than 12 consecutive months. Once the mortgage comes due, the borrower or heirs of the estate have an option to refinance the home and keep it, sell the home and cash out any remaining equity, or turn the home over to the lender.
Reverse mortgages are offered in countries such as the United States, Canada and Australia. Each country has their own rules and guidelines pertaining to eligibility, loan size, costs & interest rates, taxes & insurance, and other factors.
Some disadvantages of a reverse mortgage include:
High up-front costs, in the U.S. the costs can be almost twice of the costs of a conventional mortgage.
The interest rate on a reverse mortgage may be higher than on a conventional mortgage.
Interest compounds over the life of the reverse mortgage, which means the mortgage can grow quickly, especially if the homeowner is not making payments towards the mortgage. The longer a person has a reverse mortgage, the more likely that most or all of the home equity will be depleted when the loan becomes due.
Many seniors do not fully understand the process and results when entering into a reverse mortgage. It is important to get all of the facts and weigh the pros and cons carefully before entering into a reverse mortgage agreement.
Reverse mortgages have been advertised as a way for seniors to live mortgage free and remain in their homes, but there are several things to take into consideration before entering into a reverse mortgage agreement.