How does a reverse mortgage work?
Considering that we have suddenly been hearing about reverse mortgages all over television and radio it would seem that these must be the answer to the prayers of everyone over the age of 62.
However, it's very important that you understand how a reverse mortgage works before you opt for one. Without proper planning, these can leave you homeless.
A reverse mortgage is a loan made against the equity in your home. For most people 62 or over, this would be the entire value of their home. A reverse mortgage operates under the same basic guidelines of a mortgage until the house is paid in full.
However, a reverse mortgage pays the homeowner. Essentially, the reverse mortgage company is making monthly payments to the homeowner (who must be at least 62 years of age) until the time that the house is them purchased.
Most reverse mortgages do not go on 20 year terms, but let's say for argument's sake that they do. If you start this process when you are 62, your home will be purchased from you by the time you are 82. At this point you have one of two choices. You can move or you can take out a new loan and start paying the mortgage company back.
Keep in mind it's now 20 years later so the home you reversed mortgaged for $300,000 is now worth about $500,000 or more. Without the equity in your home, you will be hard pressed to find a mortgage company that is willing to lend out $500,000 to an 82 year old individual on a fixed income. 99% of the time reverse mortgages are set up so that the homeowner has to move at the end of the payment terms.
There are advantages to this situation. People who are facing health problems can find a little relief this way. People who are terminally ill have found that with a reverse mortgage they can live the lifestyle of their choosing until their health fails too much.
Others find that the home is the only asset they have and that at the very least they have bought themselves several more years of worry free living in their own home. It's all a matter of perspective.
Understanding how a reverse mortgage works and whether you can withstand the potential risks is the only way that you can determine whether this is a viable option for you.
Some people find that they would rather spend the next ten or fifteen years of their life without having to worry constantly about their bills. Other people live happily for awhile but are then faced with a very difficult challenge ahead.
Choosing a reverse mortgage is something that should be done with care, with respect, and with an eye toward the future no matter what you believe today holds in store for you.
While the advertised concept of a reverse mortgage is fairly new, in ten to fifteen years we will most likely hear about a slew of older generations finding themselves without a roof over their heads and facing sudden eviction from a home they have lived in all of their lives.
If you want to know more about how a reverse mortgage works, I would recommend picking up a copy of Reverse Mortgages for Dummies on Amazon. It's a cheap book but the information could save you a lot of money in the end.