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Welcome to “Ask Stacy,” a short video feature answering money questions submitted by readers and viewers. You can learn how to send in a question of your own below.
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Today’s question is on something I’m often asked about: reverse mortgages.
When I first started doing stories about reverse mortgages, I found them confusing. But once you understand the basics, they’re not hard to understand. Hit “play” on the following video for a simple explanation.
For more information on this topic, check out “Should I Take Out a Reverse Mortgage?” and “Before You Get a Reverse Mortgage, Check Out These 15 Alternatives.” You can also go to the search at the top of this page, put in the words “reverse mortgage” and find plenty of information on just about everything relating to this topic.
Got a question of your own to ask? Scroll down past the transcript and fire away!
Don’t want to watch? Here’s what I said in the video
I’m Stacy Johnson, here with your money Q&A question of the day. This question’s brought to you by MoneyTalksNews.com, serving up the best in personal finance news and advice since 1991.
Our question today comes from Ebenezer. He must be popular at Christmas! Here’s his question.
“What are the advantages and disadvantages of reverse mortgages?”
First, let’s explain what a reverse mortgage is.
A reverse mortgage is simply a mortgage: You’re borrowing money against your house. What makes a reverse mortgage different is that, instead of paying every month on your mortgage, you’re getting money every month. You could also be taking money out as a lump sum, or using the mortgage to establish a line of credit.
In any case, a reverse mortgage is like any mortgage: You’re borrowing against your house.
Since you’re not paying on your mortgage, guess what’s happening to it? The interest is piling up, increasing the principal. In other words, your mortgage is getting bigger and bigger.
You have to be 62 to get a reverse mortgage, and they’re ideal for certain people. Here’s how you know if you’re one of them.
First, if you’ve got more month than money. If you’ve got a lot of equity in your house and Social Security just isn’t doing it for you, well, maybe this is a great way for you to increase your monthly income by tapping your home equity, without leaving your home.
Keep in mind, however, that when you do leave your home, you’ve got to repay the loan.
The typical reverse mortgage borrower will stay in their house for life. After their death, their estate will sell the house and pay off the loan, or simply turn the house over to the lender. If the sale of the home isn’t enough to pay off the loan, that’s the lender’s problem. Once you’ve given up the house, your obligation is over.
Who’s not suitable for a reverse mortgage? People who want to leave their home to their kids. Remember, the mortgage is getting bigger and bigger. When you die, or when you move to a nursing home, etc., in order to keep the house in the family, someone will have to pay off that mortgage.
So to recap, a reverse mortgage is ideal for somebody who needs extra money and doesn’t really care about leaving the house to their heirs.
Before you close on a reverse mortgage, you’re going to be required to get counseling. This is a safety feature built into the law, so seniors don’t get ripped off. So here’s a final tip: Since you have to get counseling before you complete the process, why not get it before you begin the process? That way, you can understand the details and decide whether you want to get a reverse mortgage or not.
Counseling isn’t free, but it’s not expensive. You’ll often find it at nonprofit credit counseling agencies for $100 to $125. So my suggestion for anyone thinking about a reverse mortgage is to first get the counseling. Ask your questions, understand it, and then you can be more informed and make the right decision.
I hope that makes sense, Ebenezer.
Now let’s close with our quote of the day. This one comes from Dorothy Parker.
“The two most beautiful words in the English language are ‘check enclosed.'”
Dorothy, I agree. Hey, guys, make it a super profitable day, and join me again next time!
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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.
I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.
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