Advantages and Disadvantages Of A Reverse Mortgage

Betty and John, are in their mid-seventies and are currently weighing the advantages
and disadvantages of a reverse mortgage as a way of freeing up some cash.

The couple purchased their home 45 years ago for about $14,000 since then home
values have skyrocketed and recent single family homes in their neighborhood have
been selling for a minimum of $160,000.

Like Betty and John, if you’re considering a reverse mortgage it’s important to do
some research prior to making a decision. You not only need to understand the basic
principles of this kind of mortgage but you also need to look at all the advantages
and disadvantages of a reverse mortgage.

Essentially a reverse mortgage is a loan that permits homeowners 62 years of age
and older to borrow against the equity in their homes without having to sell it.
Further, you don’t have to give up the title or take on a new monthly mortgage
payment.

A reverse mortgage loan is tax-free and needs only to be repaid when the borrower
(or in the case of Betty and John, when the surviving spouse) dies or sells the
home. At which time, the reverse mortgage loan must be repaid in full, including
all interest and other charges.

When examining the advantages and disadvantages of a reverse mortgage it’s also
important to consider both the process and the related costs of obtaining a reverse
mortgage.

Unlike a conventional mortgage, with a reverse mortgage, the homeowner (the
potential borrower) must meet with a reverse mortgage counselor. References for
counselors can be obtained from banks offering reverse mortgages or the U.S.
Department of Housing and Urban Development (HUD).

The purpose of these meetings which may take place in person or on the telephone
is for the homeowner to learn about reverse mortgages and discuss alternative
options. It also helps you decide which kind of reverse mortgage may be best.

As well as exploring the advantages and disadvantages of a reverse mortgage, it’s
wise that the potential borrower, also compare costs between various lenders and
request a Total Annual Loan Cost estimate for each.

Further to discussing the advantages and disadvantages of a reverse mortgage with
a counselor, you also need to understand that there are certain costs involved
in the reverse mortgage process. Costs may include application fees, closing costs,
insurance, appraisal fees, credit report fees, and quite possibly a monthly service fee.

Remember too that since a reverse mortgage allows you to continue living in your home,
you’re still responsible for property taxes, insurance and repairs. If these payments
are not maintained, the loan could become due in full.

A reverse mortgage may also affect eligibility for federal or state assistance as well as
Medicaid. That said, any reverse mortgage money that is received is tax-free and does
not affect Social Security or Medicare benefits.

The condition of your home is also a large part of the approval process. It must be
structurally sound and in good repair. If it’s determined that home repairs need to be
done, the costs can also be financed through the reverse mortgage loan.

The total amount a homeowner can borrow all depends on the kind of reverse
mortgage selected, how much equity is in the home, the loan's interest rate and most
importantly, the age of the borrower. Typically the older a person is, the more they can
expect to receive.

A borrower can receive reverse mortgage payments in one of the following ways: in a
lump-sum payment; fixed monthly payments; a line of credit or a combination of any of
the above. Most homeowners go for the line of credit option which allows them to draw
on the loan whenever money is required.

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