Reverse Mortgages Have Appeal, but Require Forethought
In the last 10 years, reverse mortgages have become increasingly popular. If you are 62 or older and are "house-rich and cash poor," a reverse mortgage may have appeal as a way to get your hands on cash. Unlike a traditional mortgage loan, where you make a payment to your lender each month, in a reverse mortgage the lender advances a payment to you out of the home's equity. Unlike conventional home equity loans, most reverse mortgages don't require repayment of principal, interest, or servicing fees for as long as you live in the home. You retain home ownership and are still responsible for taxes, repairs and maintenance.
To qualify for a reverse mortgage, you must own your home. Funds may be paid to you in a lump sum, in monthly advances, through a line of credit, or in a combination thereof. The amount is generally based on your age, the home's equity, and the interest rate charged. Your reverse mortgage becomes due with interest when you permanently move, sell your home, die, or reach the end of a pre-selected loan term. If you die, the lender doesn't take title to your home, but your heirs must repay the loan. The debt is typically repaid by refinancing the loan into a regular mortgage or by using proceeds from the home's sale.
Besides interest charges, there are typically closing costs and fees for the application, appraisal, credit report, origination, insurance and monthly servicing. Reverse mortgages are most expensive early on-costs can be very high short term-and become less costly over time. You should carefully consider all costs, as well as the effect it may have on your heirs, tax consequences and other factors, before applying. Because your home is such a valuable asset, you may want to consult with your family, financial advisor or attorney. Being aware of your financial rights and responsibilities may help minimize the risks, and the threat of foreclosure or loss of the home.
