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Considering a Reverse Mortgage? The Basics

Most homeowners have gone through the experience of getting a mortgage. Folks buying a home who are unable to pay the entire cost for the real property out of pocket, apply for a loan–referred to as a mortgage. In a traditional mortgage situation, the homeowner borrows a sum of money from a lender, frequently a bank, and pays this sum back to the lender in monthly payments. But in a reverse mortgage scenario, the homeowner receives money from the lender, against the value of the home. People with reverse mortgages often use the money for house repairs, property taxes, vacation, and basic costs of living, when their fixed income and savings prove insufficient. And in certain circumstances, reverse mortgages can be a prudent financial choice for an individual or couple.

There are several types of reverse mortgages, but in general a person has to be 62 years or older to qualify for this type of loan. Additionally, you must own your home outright or have a low enough remaining balance on that mortgage to qualify. By signing up for a reverse mortgage, a homeowner is agreeing that the balance of this reverse mortgage loan will be repaid from the sale of the house, either when the homeowner moves out or passes away. As such, homeowners may not be able to leave as much money or property to family and heirs, because all creditors (i.e. people to whom the homeowner owes money) must be paid before the beneficiaries (i.e. people to whom the homeowner wants to leave money or property). Estate planning can therefore be tricky when a reverse mortgage is in the mix.

Like any other type of loan, reverse mortgages have fees associated with them. Homeowners may have to pay an origination fee, service fees, insurance premiums and closing fees. Although reverse mortgage proceeds are generally tax-free, they accrue interest, which means that the homeowner’s total debt increases as he or she receives more money from the lender and as more time passes. A reverse mortgage can also exceed the total value or equity of the house, therefore making it impossible for the homeowner to leave equity or proceeds related to the sale of the home to his or her family or heirs.

In short, a reverse mortgage has a lot of moving parts, and a prudent homeowner should consult with a financial advisor, estate planner, or other experienced professional in this field before undertaking such a financial responsibility.