Reverse Mortgages are Just One Option Available
A reverse mortgage is a loan against a home’s equity that doesn’t need to be paid back until the homeowner dies, sells the home, or moves out. Available to homeowners age 62 and older, it can be paid in a lump sum or in monthly installments. There are benefits to using a reverse mortgage, but there are downsides as well. Many homeowners, particularly those with good credit, can often find less expensive alternatives.
The main reason people use a reverse mortgage is that they get to stay in their home for as long as they wish. As stated above, no payments are required while you remain in your home, though the balance due does rise as more payouts are made and interest accrues. If home prices rise at a significantly higher rate than interest on the loan, then reverse mortgages can be affordable. Of course, as the recent housing downturn has shown, prices don’t always rise. Another reason people use reverse mortgages is that you can usually get one if you have equity in your home, regardless of your credit. This may be a reason for people with poor credit to use them, but it doesn’t mean they are the best option for everyone.
The main downside of a reverse mortgage is the high upfront costs. Wikipedia reports that
For the most popular type of reverse mortgage in the U.S., there is an insurance premium of 2% of the loan and a 2% origination fee in addition to normal closing costs.
Interest rates tend to be adjustable, as the duration of the loan is unknown. Rates are reset on a regular basis, as often as every month.
As mentioned above, reverse mortgages are available to homeowners aged 62 or older. As such, the senior citizen advocacy group American Association of Retired Persons (AARP) has covered the topic at length. To get you started, see their brief discussion of 5 questions to ask before considering a reverse mortgage, listed below.
- Do you really need a reverse mortgage?
- Can you afford a reverse mortgage?
- Can you afford to start using up your home equity now?
- Do you have less costly options?
- Do you fully understand how these loans work?
This is just an overview of reverse mortgages. In addition to answering the above questions from the AARP, I urge anyone thinking of using a reverse mortgage to thoroughly research them, and other options, before making a decision. Reverse mortgages are one option, but for many people there may be more affordable alternatives.
Friday, April 11th, 2008 at 7:20 am