TV ads for reverse mortgages feature older respected movie stars in front of a large house and expensive car who describe a carefree life of travel and security for people in their golden years. The free DVD explains the process of reverse mortgages and their benefits. It has testimonials from people whose life it benefited. It looks like free money, but it's not. Prospective borrowers should thoroughly research reverse mortgage pros and cons before signing up.Credit: Public domain courtesy Pubdog
Reverse Mortgage Pros
A reverse mortgage is when someone sells the equity in their home, and receives monthly payments as long as they live in the house. The borrowers keep title to the house without the payments. They have to be over 62 years old, and have equity in the house. The basis for the loan is the home value, equity, health and age of the borrower. The payments are tax free, and can be in monthly payments, as a lump sum or other ways negotiated with the lender. Social Security and Medicare eligibility aren't impacted by a reverse mortgage, but supplemental and other benefits may be affected. HUD, housing and urban development is a good source of information for these loans. Hud reverse mortgages offer information by state and other parameters.
Reverse Mortgage Cons
Sales tactics are aggressive and reverse mortgage rates may be predatory. Upfront costs and closing fees are often higher than with a regular loan. The borrowers are still liable for the property taxes and home insurance on what used to be their house. While the income from a reverse mortgage is tax free, the property tax isn't shifted to the lender. If these costs aren't kept current, the lender may require early loan repayment. The survivors have the option to pay off the loan balance plus interest, or sell the house when the borrowers pass away. If the house is worth less than the mortgage, it's the lenders problem. If it's more, the surplus goes to the heirs.
Reverse Mortgage Counselors
Counseling is required as part of obtaining a reverse mortgage. Preferably, use one that is not associated with the loan company. Reverse mortgage counseling is the most important part of the procedure. Before going to the counselor, the prospective borrowers should do some homework to know most of the ins and outs of the loan and terminology. Become familiar with reverse mortgage rules. There are many sites on the internet that feature reverse mortgage calculators and other information on these loans.
House repairs are often reasons recommended for taking out a reverse mortgage. Sometimes other options are better solutions. A small mortgage on the house may be better as the interest and payments may be lower than a reverse mortgage. The counselor may be able to point the borrowers in the direction of low interest or funds available to seniors.
A reverse mortgage may be beneficial or not. There are many things to consider before signing up for the loan. Some financial counselors recommend them only as a last resort. As in all things, the fine print is often the most important part of the contract.