Pros & Cons of Reverse Mortgages

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Pros & Cons of Reverse Mortgages
Pros & Cons of Reverse Mortgages (Image: http://www.sxc.hu/photo/816354)

For some senior citizens, especially those on fixed incomes, the cost of living is beyond their ability to afford. When prices continue to rise, but income stays the same, how can you expect to meet your expenses? One way is for senior homeowners, at least 62 years old, to take advantage of a reverse mortgage to generate income and still remain in their homes.

Identification

With a reverse mortgage, the homeowner takes out a loan based on the equity and market value of his home. Currently, the maximum loan available is for $417,000. Any current mortgage on the home is paid off with the proceeds of the reverse mortgage, and the bank makes either a lump sum or monthly payments to the homeowner with the remaining funds. Alternately, the homeowner can set up a line of credit with the proceeds of the reverse mortgage to draw on when necessary.

Function

Homeowners retain the title to their homes and remain responsible for paying real estate taxes and homeowner's insurance. In addition, any repairs or improvements needed to maintain the home are the responsibility of the homeowner. The availability of funds from a reverse mortgage, however, allows many seniors to pay these costs.

Features

The upfront costs of a reverse mortgage are higher than for a conventional mortgage. Particularly expensive is the required mortgage insurance, which is equal to 2 percent of home's value. For a home valued at $300,000, that amounts to $6,000 on top of other standard closing costs, such as prepaid interest, points and legal fees.

Time Frame

To qualify for a reverse mortgage, the homeowner must continue to live in the residence as his main home. The interest rate on the loan is variable and can fluctuate over time. The reverse mortgage loan does not have to be repaid as long as the homeowner stays in the home. When the senior permanently moves out of his residence, the loan comes due. In some cases, if the homeowner leaves the home, even temporarily, such as for a nursing home stay, his loan may be called in.

Benefits

There are no income requirements to qualify for a reverse mortgage. Nor is your debt considered in the application process. The reverse mortgage provides financial relief to cash-strapped seniors who might otherwise have to sell their homes. The homeowner can stay in his home longer under more comfortable financial circumstances. Family members are under less pressure to financially assist their senior loved one.

Considerations

Homeowners may use the proceeds of a reverse mortgage in any way they choose. Some pay their real estate taxes and other home related expenses. Others need the money for health care or to pay off existing debt. Still others simply want to invest the proceeds to enhance their retirement.

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