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Reverse Mortgage
Be Sure You Need It Before Applying For One
Reverse
mortgages used to be considered the last resort of desperate retirees who
needed to borrow against their home equity in order to pay for medical
expenses. With home prices across the country rising at astonishing rates, more
and more retirees, aged 62 and over, are taking out reverse mortgages to fund
better retirement living. A reverse mortgage works more or less the opposite
way from a conventional mortgage; the borrower receives payments from the
lender in the form of a lump sum, a line of credit, or monthly payments. The
amount borrowed constitutes a lien against the home must be repaid upon the death
of the borrower, or when the home is resold. There are costs associated with a
reverse mortgage, however, and potential borrowers should be aware of these
when considering taking out such a loan, particularly if the borrower takes out
a line of credit.
All loans have fees associated with them. There are home appraisals, paperwork
fees, mortgage insurance fees, and additional “points” added to the cost of the
loan. In general, the costs of taking out a reverse mortgage are higher than
those associated with a traditional mortgage. There are several reasons for
this, including the fact that the time period for receiving repayment of the
loan is indefinite, typically depending on how long the borrower lives. This
uncertainty is added into the loan in the form of additional fees.
Most people who take out a reverse mortgage opt to take their funds in the form
of a line of credit, rather than a lump sum or monthly payments. There are
advantages to a line of credit, which allows the borrower to use the funds by simply
writing checks against the loan. The primary advantage is that the borrower
only uses the funds when he or she needs them. Because of this, interest only
accrues on the money if the borrower actually writes checks. Borrowers should
be aware, however, that the costs of the loan, which can be substantial, apply
even if the borrower doesn’t write any checks against the loan. If the
homeowner takes out a line of credit and decides to sell the home shortly
thereafter without ever having written a check against the loan, the borrower
will not owe the lender any interest or principal, but the borrower will lose
the money paid for the cost of the loan, which is not refundable. If the
borrower rolled the costs into the loan itself, they could owe payments even if
they never wrote a check.
In short, borrowers considering taking out a reverse mortgage should make sure
that they plan to stay in their home for quite some time and that they actually
need the money from such a loan. A reverse mortgage is a great idea for those
who have a specific purpose or use in mind, but as an emergency source of
“rainy day” funds, it can be an expensive choice.
©Copyright
2005 by Retro Marketing. Charles Essmeier is the owner of Retro Marketing, a
firm devoted to informational Websites, including End-Your-Debt.com, a Website
devoted to debt consolidation information and HomeEquityHelp.net, a site
devoted to information on home equity loans.
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