Reverse Mortgages: How They Work, Their Benefits and Drawbacks | Mortgage

By IgorBuces
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A seniors reverse mortgage is unlike a typical home mortgage in many ways. Before you decide on getting one, it's necessary for you to learn how they work and what are its main pros and cons.

In a reverse mortgage, you never make a mortgage payment while you live in your home. As a matter of fact, the opposite actually occurs: the bank pays you money. You can get the money from the bank in one of three different ways: lump sum, line of credit or monthly payments.

Because you get payments from the lender, the debt in your home increases as time goes by and you get more money from the loan. At the same time, the equity in your house decreases as you get those payments.

When your senior reverse mortgage becomes due - either because you move out of the house or you pass away - the debt in your home many be very large, and the equity very small. If you have received a lot of money from the loan, there may be no equity left at the end of the mortgage. However, you can never owe more money than your home is worth.

Since you don't make any monthly payments, you don't need to have a steady income to qualify. You can have no income and still qualify for a senior reverse mortgage. As a matter of fact, many seniors get this type of loan because it offers them a "second" income. In addition, your credit history is of no concern.

The only requirements you must fulfill are that you are 62 years old, you live in the house and that there is enough equity in the home.

How much money you can borrow depends on three factors:

How old you are

The present interest rate

Your home estimated value or the FHA's mortgage limit for the area where you live

In general, the older you are, the greater the appraised value of your home and the lower the present interest rates are, the more money you can borrow with a reverse mortgage.

It is important for you to remember that since you keep ownership of the house, you are still required to pay real estate taxes, insurance and general maintenance costs.

Reverse Mortgage Benefits

There are many benefits associated to a reverse mortgage. These are some of the biggest:

You don't need to leave your home. You can stay in your home for as long as you want.

You don't need income to qualify. The lender is the one paying you.

You don't have to make any payments on a reverse home mortgage

You can't loose your home because you aren't able to make mortgage payments

You can never be evicted your home for as long as you live in it. However, you still need to make real estate, insurance and maintenance payments.

You can use the money from the reverse mortgage for any thing you want.

The funds from a reverse mortgage are usually tax deductible

Most reverse mortgages have no income limitations

Your Social Security and Medicare payments are usually not affected

Senior Reverse Mortgage Drawbacks

As with any type of mortgage, a senior reverse mortgage has some drawbacks. Many of them are only potential and depend on your individual situation. Nevertheless, it's a good for you to know about these drawbacks before choosing to apply for a reverse mortgage.

These are some of the cons you need to consider before applying for a reverse mortgage:

The majority of reverse mortgages have variable interest rates. Your interest rates will change as the market changes.

Since reverse mortgages work by decreasing your home equity, you can use up most of your home equity, leaving little money left from the sale of the house for you and your heirs. However, a "non-recourse" clause found in most reverse home loans prevents either you or your heirs from owing more money than your home is worth.

Since you are still the owner of your home, you are still accountable for the real estate taxes, utilities, insurance and maintenance.

Most banks charge origination fees and closing costs. Most lenders also may charge servicing fees during the life of the mortgage. These fees are included in the loan.

The interest portion of a reverse mortgage is not deductible in your tax returns until the home loan is paid off (in part or whole.)

There is usually a less expensive solution to your financial problems ( a credit line, refinancing your present home mortgage, etc.)

To reduce some of these drawbacks, make sure you apply for your reverse mortgage through a trustworthy company who will educate you throughout the reverse mortgage process and beyond.

About the Author

Before you apply for a Reverse Mortgage, make sure you learn all about them. You can read dozens of educational articles at Senior Reverse Mortgage.

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