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Reverse Mortgages: How They Work, Their Benefits and Drawbacks

May 3, 2008
A seniors reverse mortgage is unlike a typical home mortgage in many ways. Before you decide on getting one, it's necessary for you to learn how they work and what are its main pros and cons.

In a senior reverse home mortgage, you never make a monthly mortgage payment for as long as you live in your home. In reality, the opposite occurs: The lender gives YOU money in one of three ways: a one time amount of money, a credit line or monthly payments.

Because you get payments from the lender, the debt in your home increases as time goes by and you get more money from the loan. At the same time, the equity in your house decreases as you get those payments.

Whenever the time comes to pay back your reverse mortgage - you move out of the home or you die -, the debt may be large and you may have little equity left in the house. However, no matter how much money you owe, it can never be more than the value of the home.

Since you don't need to make any monthly repayments, you don't need any type of income to qualify. You could have no income and still qualify for a reverse mortgage. Also, your credit history is of no concern.

The only requirements are that you are at least 62 years old, and that there is enough equity in the home.

The amount of money you can borrow depends on three factors:

How old you are

The present interest rate

Your home appraised value or the FHA's home mortgage limit for your area

In general, the older you are, the bigger the appraised value of the home and the lower the interest rates, the more money you can borrow with a reverse mortgage.

It is important for you to remember that since you keep ownership of the house, you are still required to pay real estate taxes, insurance and general maintenance costs.

Senior Reverse Mortgage Benefits

There are many benefits associated to a reverse mortgage. These are some of the biggest:

You won't need to leave your home. You can stay living in your home for as long as you want.

You don't need a monthly income to qualify. The bank is the one paying you monthly payments.

You don't need to make any repayments on a reverse mortgage

You can't ever loose your home because you don't make mortgage payments.

You can never be evicted your home for as long as you live in it. However, you still need to make real estate, insurance and maintenance payments.

You choose how you want to use the proceeds from a reverse mortgage

The funds are usually tax deductible

Most senior reverse mortgages have no income limitations

Your Social Security and Medicare payments are usually not affected

Reverse Mortgage Drawbacks

As with any mortgage, reverse mortgages have some drawbacks associated to them. Some of these drawbacks are only potential and depending on a person's individual situation. Nevertheless, it's a good idea for you to learn about these drawbacks before choosing a seniors reverse mortgage.

These are some of the cons you need to consider before applying for a reverse mortgage:

Almost all reverse mortgages have variable interest rates. Your rates will change as the market changes.

Since reverse mortgages work by decreasing the equity in your home, you can use up most of the equity, leaving little money left for you and your heirs. However, a "non-recourse" clause found in most reverse home loans prevents either you or your heirs from owing more money than your home is sold forth.

Since you are retaining ownership of your home, you are responsible for the real estate taxes, utilities, insurance and maintenance.

Most banks charge origination fees and closing costs. Most lenders also may charge servicing fees during the life of the mortgage. These fees are included in the loan.

The interest paid on a reverse mortgage is not deductible in your income tax returns until the home mortgage is paid off (in part or whole.)

There is usually a less expensive solution to your financial problems ( a credit line, refinancing your present home mortgage, etc.)

To reduce some of these drawbacks, make sure you apply for your reverse mortgage through a trustworthy company who will educate you throughout the reverse mortgage process and beyond.
About the Author
Before you get a Reverse Mortgage , make sure you learn all about them. You can read dozens of educational articles at Senior Reverse Mortgage .
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