You may have seen recent TV commercials starring The Golden Girls star Rue McClanahan promoting reverse mortgages. What are these loans? Who is Eligible? And what are the risks involved?
A reverse mortgage is a type of loan available to seniors who have a lot of equity in their homes but little cash. It is literally a reverse mortgage where a homeowner can access the equity locked in their home through a special loan from the bank. This money is paid either in monthly installments or all at once. There are no monthly costs for the borrower and the loan only becomes due when the property is sold or the homeowner dies. At this point, all interest and fees associated with the loan are due in one lump sum.
For seniors who need money for everyday expenses like medication, bills, or travel expenses, a reverse mortgage can be a good option.
Other home loans are available but require monthly payments that some seniors find difficult to afford. This is one of the reasons why a reverse mortgage can work well for some people; Not only can they free up some money from their home equity, but they can do so without increasing their monthly expenses.
On the other hand, since the money for this type of loan comes from the home, a reverse mortgage can affect the amount of inheritance that beneficiaries receive. When the property is sold (or at the time of the owner’s death), the bank takes back any monies owed to it and leaves what is left to the borrower. The more money borrowed on a reverse mortgage, the less money is left for the heirs of the estate. Fortunately, there is a limit to how much can be owed. When the property is sold, if the proceeds from the sale are less than the amount still owed on the loan, the bank will absorb the difference.
To qualify for a reverse mortgage, the borrower must be at least 62 years old, have the property as their primary residence, keep their home in good condition, and have paid off all or most of their mortgage. If there is a residual debt from the mortgage, this must be paid in full with funds from the new loan.
If possible, a better solution is to sell the property and downsize into a smaller house or apartment. This would allow the homeowner to live on the profits from the sale without owing anyone anything. However, this is not a viable option for everyone, especially in a slow real estate market.
A reverse mortgage can bring great relief to seniors, but this type of financing isn’t for everyone. The costs associated with this type of loan are quite high at the beginning, although the borrower is not affected by it from month to month. Unless the homeowner plans to stay in the home very long, the cost of taking out this type of loan may be too high to be practical. Some fees must be prepaid (with loan funds) and closing fees may be higher than other types of financing. A homeowner should only consider this type of loan if they plan to stay in the home longer. If she’s not at all sure about her plans, it may be better to take out another type of home loan or to explore the possibility of selling the property.
Because predatory lenders often target seniors, the government has made it mandatory for anyone interested in purchasing a reverse mortgage to speak with a qualified outside counselor. This ensures that the borrower is doing what is in their best interests, including choosing a reputable lender to do business with.