Reverse Mortgage Information and Tips

The reverse mortgage allows homeowners age 65 or older to use the equity on their house as a way to increase their income, almost always taken as a lump sum payment. While a mortgage is a loan where repayments start the first month after it's approved, the reverse mortgage isn't paid until the house is sold – typically because the homeowner dies or needs to move. Money from a reverse mortgage can be spent in any way the home owner sees fit, from taking a holiday to making improvements on the home. However, it should be noted that having a reverse mortgage creates new debt on the home, perhaps long after the original mortgage had been repaid. This can be seen as a disadvantage to some. There are several other disadvantages to applying for a reverse mortgage and this option should be considered carefully against other income options. But oftentimes it its a viable option for asset rich, but income poor home owners to release some income tied to their property.



Costs and Fees

Reverse mortgages are not based in a persons income or credit score. They are based solely on the equity of the house and the borrowers age. For some retirees looking for the reverse mortgage as additional income, the up front fees can be very expensive. Interest rates on reverse mortgages are typically .5% to 1% above the standard mortgage rates. However, if one needs the money for home improvements or a vehicle, the benefits of a reverse mortgage could be worth the fees. Insurance must be kept on the home if a reverse mortgage is to be taken so this is an expense homeowners must remember to keep up on. A lawyer will also be needed to review documents and to provide legal advice related to the reverse mortgage.



Pensions

Because the money gained from a reverse mortgage is considered income or "liquid assets", that can work against seniors collecting pensions. Seniors should check with Centrelink regarding their personal situation before applying for a reverse mortgage. Typically if a senior is depending on a full pension and has little or no other assets, taking out a reverse mortgage for a car, home improvements, or holiday will have no effect on the pension payments.



Loss to Heirs

While some seniors may not consider the reduction in money for their heirs as a detriment to applying for a reverse mortgage, to some it can be a drawback. Because the reverse mortgage has to be paid back when the homeowner dies, this can leave the heirs faced with either paying back the reverse mortgage themselves or selling the home in order to pay the loan. The interest that can accumulate on a reverse mortgage can be high, so that is also another factor to consider regarding repayments down the road.



Selling the Home

One of the conditions of a reverse mortgage is that the person applying must own the residence. If there is a possibility of having to sell the house to move in the near future, perhaps to assisted living or a more manageable home, the reverse mortgage might not be a good option. As soon as the homeowner sells the home they have to start paying back the reverse mortgage. If there were a lot of upfront fees or a high interest rate, the homeowner could end up owing more then the loan was worth.



Title

Homeowners considering a reverse mortgage often worry that it means they are selling their home to the lender. This is not the case. Homeowners still hold the title to their house when taking out a reverse mortgage.



Scams

As with any situation involving money lending, homeowners should be sure to find a reputable mortgage lender to work with. Offers that sound too good to be true, usually are. Avoid those promising super low interest rates, fast processing, or anything else that makes it sound like they are trying to "sell" their services. Seniors can check with their bank, or a lawyer to be sure the reverse mortgage they are applying for is legitimate.



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