A reverse mortgage is a loan option available to seniors in need of funds. A line of credit is secured against the equity in the home, and is paid out in either a lump sum or a stream of regular payments. The interest on this line of credit is added to the lien on the property and is paid to the lender when the home is sold or when the owner dies (must be paid by the estate) or moves to an assisted living facility.
More About Reverse Mortgages
A reverse mortgage is a not a loan meant to purchase a home. Instead, it is a loan option available to seniors over the age of 60 who may be in need of funds. A line of credit is extended to the borrower and is backed up by the equity in the home. These funds are paid out to the borrower in either a lump sum or a series of regular payments over time. The interest compounded on this loan or line of credit is then added to the lien on the property and is paid back to the bank:
- If or when the home is sold
- When the owner dies (must be paid by the estate)
- When the owner leaves the home and moves to an assisted living facility
Advantages of Reverse Mortgages
The benefit of a reverse mortgage is that it makes the investment asset – the property – work for the owner. By age 60, the home is either paid off or close to it, meaning that there is a large amount of equity to take advantage of. Seniors typically have less income, so this equity can really come in handy and can take the place of the diminished cash flow typically seen by the elderly.
Another advantage is that seniors make money off the property without actually selling it. Borrowers who take advantage of reverse mortgages make money off the home but still get the benefit of staying in their property and their familiar surroundings.
Perhaps the biggest plus when considering a reverse mortgage is the lack of repayments to be made on the part of the borrower. There is not set payment schedule, and repayment only occurs when the borrower dies or takes action such as selling the home or moving to a retirement community.
Disadvantages of Reverse Mortgages
One drawback to a reverse mortgage is the hit that equity will take. The home owner slowly owns less of the house over time in a reverse mortgage. If the home owner decides to sell the home or move into assisted living, it may be difficult or even impossible to sell the home if there is too much of a loss of equity. Also, the less of the property that the senior “owns,” the less there is to leave to loved ones in a will. Beneficiaries may find themselves in a tough situation, inheriting little or no property or even owing the bank in some cases.
There are also issues to look for when obtaining a reverse mortgage. Reputable lenders will offer a “no negative equity guarantee” to ensure that seniors will not overdraw their account and lose their home. There are also issues that can come up that could cause the borrower to accidentally default on the reverse mortgage, causing the lender to demand immediate repayment. These are major concerns and should be discussed with a professional. To learn more about the ins and outs of reverse mortgages and decide which solution is best for you, please complete the contact form below.