Understanding How Reverse Mortgages Work
Reverse mortgages have received some significant press recently, but the concept itself is somewhat complicated. With the baby boomer population starting to reach retirement age, it’s likely that the demand for reverse mortgages will only increase.
A reverse mortgage is a great option for some seniors; however, a reverse mortgage isn’t for everyone. For those considering a reverse mortgage, following is some information that you need to consider.
What is a reverse mortgage?
A reverse mortgage is a loan that a credit agency takes out against your home, while you are still living in it. The reverse mortgage doesn’t need to be repaid until the homeowner dies, permanently moves out, or sells their home. Terms can vary, but some choose to get a lump sum payment, while others choose a line of credit or periodic payments. Reverse mortgages are available from private lenders, from the U.S. Department of Housing and Urban Development (HUD), from some nonprofit organizations, and from some state and national government programs. Homeowners retain the title to their property, and therefore need to continue making insurance and tax payments. Usually with a reverse mortgage, you don’t risk losing your home while you are up to date with insurance and tax payments, as long as you continue to live in the home.
How much do you get for a reverse mortgage?
The amount of money you get from a reverse mortgage depends upon the current market value of your home. However, you shouldn’t expect to receive the full value of your home, instead you’ll likely get a percentage of that value. Interest accrues, so the amount you’ll owe continues to grow over time.
Should I consider a reverse mortgage?
Many seniors benefit from taking out a reverse mortgage; however it is a big decision that should be made carefully.
First, consider all of your options–there may be something less expensive that will work better. Reverse mortgages usually have up-front fees, so they aren’t always the best option for a shorter-term loan. Also, if you take out a reverse mortgage, you are likely using your greatest asset.
Reverse mortgages are secured, so you may not want to use a reverse mortgage as a tool to pay down unsecured debt. In other words, you’ll need to take some time to consider whether or not you want to use your home equity. Talking to heirs or a financial planner might help you with the decision making process.
If you do decide to take out a reverse mortgage, do some research to find a highly recommended lender that offers competitive rates. You will also need to attend a reverse mortgage counseling session offered by a HUD-approved agency, such as Money Management International (MMI). Visit our Reverse Mortgage resources page to learn more about the counseling process.