Copyright 2005 Paul Jesse
Betty and John, are in their mid-seventies and are currently weighing the
advantages and disadvantages of a reverse mortgage as a way of freeing up some
cash. The couple purchased their home 45 years ago for about $14,000 since then
home values have skyrocketed and recent single family homes in their
neighborhood have been selling for a minimum of $160,000.
Like Betty and John, if you’re considering a reverse mortgage it’s important to
do some research prior to making a decision. You not only need to understand the
basic principles of this kind of mortgage but you also need to look at all the
advantages and disadvantages of a reverse mortgage.
Essentially a reverse mortgage is a loan that permits homeowners 62 years of age
and older to borrow against the equity in their homes without having to sell it.
Further, you don’t have to give up the title or take on a new monthly mortgage
payment.
A reverse mortgage loan is tax-free and needs only to be repaid when the
borrower (or in the case of Betty and John, when the surviving spouse) dies or
sells the home. At which time, the reverse mortgage loan must be repaid in full,
including all interest and other charges.
When examining the advantages and disadvantages of a reverse mortgage it’s also
important to consider both the process and the related costs of obtaining a
reverse mortgage. Unlike a conventional mortgage, with a reverse mortgage, the
homeowner (the potential borrower) must meet with a reverse mortgage counselor.
References for counselors can be obtained from banks offering reverse mortgages
or the U.S. Department of Housing and Urban Development (HUD).
The purpose of these meetings which may take place in person or on the telephone
is for the homeowner to learn about reverse mortgages and discuss alternative
options. It also helps you decide which kind of reverse mortgage may be best. As
well as exploring the advantages and disadvantages of a reverse mortgage, it’s
wise that the potential borrower, also compare costs between various lenders and
request a Total Annual Loan Cost estimate for each.
Further to discussing the advantages and disadvantages of a reverse mortgage
with a counselor, you also need to understand that there are certain costs
involved in the reverse mortgage process. Costs may include application fees,
closing costs, insurance, appraisal fees, credit report fees, and quite possibly
a monthly service fee. Remember too that since a reverse mortgage allows you to
continue living in your home, you’re still responsible for property taxes,
insurance and repairs. If these payments are not maintained, the loan could
become due in full.
A reverse mortgage may also affect eligibility for federal or state assistance
as well as Medicaid. That said, any reverse mortgage money that is received is
tax-free and does not affect Social Security or Medicare benefits.
The condition of your home is also a large part of the approval process. It must
be structurally sound and in good repair. If it’s determined that home repairs
need to be done, the costs can also be financed through the reverse mortgage
loan.
The total amount a homeowner can borrow all depends on the kind of reverse
mortgage selected, how much equity is in the home, the loan's interest rate and
most importantly, the age of the borrower. Typically the older a person is, the
more they can expect to receive.
A borrower can receive reverse mortgage payments in one of the following ways:
in a lump-sum payment; fixed monthly payments; a line of credit or a combination
of any of the above. Most homeowners go for the line of credit option which
allows them to draw on the loan whenever money is required.
Paul Jesse is a retired government employee, small business owner and the
author of many articles on finance and internet marketing. Visit his website at:
http://www.sheamarketing.com