Reverse mortgage

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A reverse mortgage is just what it sounds like: a mortgage that operates backwards. If you own your house and want to continue to live in it, but would like to make use of the equity while you are still alive you may be able to get a reverse mortgage. A bank basically guarantees you a payment every month for the rest of your life or until you move out of the house. When you die, the payment for the loan (interest, principles and fees) is paid by your heirs or by selling the house.

Obviously this type of arrangement is typically attractive to people well into retirement, but there are some hidden dangers to be aware of. The check can be a great income, but it will disappear if you need to move into a nursing home. When you move out of your house the loan becomes due. Most of the time you have to be over 62 and fully own your house in order to qualify for a reverse mortgage.

Often reverse mortgages have significant fees ad you will not benefit from any appreciation in the house value. With the HUD version of a reverse mortgage any equity beyond the cost of the loan, interest and fees would go to your heirs.

It is often a better deal to simply sell the house and move to a smaller place when you want to use the equity. A home equity loan is another possible option that might be worth considering.

Reverse mortgages are typically paid in three different ways:

  1. Tenure - You receive a fixed amount as long as you stay in the home.
  2. Term - You receive a fixed amount for a predefined period of time.
  3. Line of Credit - You can borrow up to a certain amount as needed.

The biggest advantage of a reverse mortgage is the way no payments are due until you move out of your house. The biggest drawback is the fact that reverse mortgages are a very expensive way to borrow money. The fees for setting up a reverse mortgage are high and there are variable fees that can't be predicted ahead of time. For example, fees will usually cost around $25,000 for a $250,000 house. That is 10% and all of that is before interest.

While a reverse mortgage may be a good way to get money for basic living expenses and survival, it is not a good way to get money for investments or luxury items. A reverse mortgage should be considered a last resort for seniors. It is an option for people who simply do not have enough money to live on and need some way to generate cash without moving out of their home. For most people, selling their house would be a better financial alternative.

One downside to reverse mortgages is the fact that a number of people intentionally try to take advantage of seniors. With reverse mortgages only being available to seniors, this field tends to attract a lot of scam oriented individuals. If you are looking at getting a reverse mortgage make sure you check around and find a company that is known for being reputable, fair and honest. Talk to your lawyer and friends about companies they have had good experiences with.