Reverse mortgages are a relatively recent product on the credit scene. The approval process is somewhat abbreviated compared to a traditional home loan, but there are some conditions and requirements that make a reverse mortgage unique to other home loans.

What is a reverse mortgage?

It is a mortgage loan that allows the owner to access the equity accumulated in the home. Some borrowers prefer a lump sum when purchasing stocks. Others choose to receive monthly payments. No reverse mortgage payment is required until the owner dies, sells the house, or abandons it for more than 12 months, for example, to go to a nursing home. At that point, the reverse mortgage must be paid off, either by selling the home or by reimbursing loved ones who will take possession of the home.

Am I Qualified?

The main prerequisites for a reverse mortgage are that borrowers are 62 years of age or older and have equity in their homes. Borrowers of these mortgages are required by the U.S. Department of Housing and Urban Development (HUD) to obtain financial advice from a HUD-approved third party prior to finalizing the note. Once the funds are released, the old mortgage must be canceled. In most cases, borrowers can use their leftover home equity funds in any way they want.

What are the advantages?

The biggest advantage of is that the borrower has full access to the equity accumulated in the home. With medical costs at record highs and medical expenses declining for seniors, many are obtaining reverse mortgages to pay for ongoing medical bills that are not covered by Medicare or Medicaid. Others have no extended family to leave their estate to, so they take out these mortgages for vacations and other recreational activities and products, so they can enjoy their twilight years.

In the past, older people used to take a reverse mortgage without understanding the consequences. The results were devastating for many when they realized that they had little or nothing left to pass on to their children. HUD now requires that all those considering a reverse mortgage undergo financial counseling, so that seniors understand exactly what they are getting into before taking on a mortgage.

What are the disadvantages?

There are many disadvantages to a reverse mortgage. Many older people have worked hard their entire lives to achieve financial independence and provide a legacy and inheritance for their children. Although having access to home equity will provide greater financial opportunities, the legacy and inheritance will be hampered and diminished.

Some homes are not rated and others must meet strict requirements; for example, a mobile home must be located on a concrete base, among other limitations. Surprisingly, lenders can legally charge loan origination fees of up to $ 6,000. Interest continues to increase on the loan for the rest of the homeowner’s life, or until the home is sold, and is added to the property bond through the reverse mortgage contract.

If you are considering a reverse mortgage, talk to your family members first. Include your children in the discussion. There may be other options you can follow without having your home tied up in a loan that will reduce the equity you have worked so hard to accumulate.

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