People often ask me about reverse mortgages. A Money Talks News reader named Ebenezer puts it succinctly:
“What are the advantages and disadvantages of 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.
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 are 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 the 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.
Who should — and should not — consider a reverse mortgage?
For starters, you have to be 62 to get a reverse mortgage. You also might be a good candidate for a reverse mortgage 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.
Typically, reverse mortgage borrowers stay in their house for life. After their death, their estate sells the house and pays off the loan, or simply turns 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., someone will have to pay off that mortgage if you want to keep the house in the family.
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.
Things to know before you close
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 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.