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The Ins and Outs of Reverse Mortgages


Funding your retirement can be a real challenge for many Americans. Everyone is eager to retire, to enjoy traveling, to practice some hobbies, and to spend time with family and friends while still relatively young and in good health. Unfortunately, paying for your retirement is not always easy and affordable. Since the 1960s, some older people have been able to turn to reverse mortgages as a way to take advantage of their home's equity. In recent years and harder economic times, the loans have become increasingly popular.

What is a reverse mortgage?

Like home equity loans and lines of credit, a reverse mortgage allows homeowners to draw upon the equity accrued in their property.  You will receive payments calculated to be a percentage of the equity in your home.  In this sense, you are actually getting paid to live in your house, townhouse, or condo.  When you sell or otherwise cease to occupy the property, the bank will recoup its money.  It almost sounds too good to be true – a home equity loan that does not need to be paid back in your lifetime.

Is it right for you?

There are some rules and conditions that apply before you can determine whether or not a reverse mortgage is a good option for you.  You should be:

  • Free from debt:  You can only obtain one of these home loans if there are no other outstanding liens on your property.  You should own your home outright or be prepared to have other loans taken over by the lender who is financing your reverse mortgage.
  • Planning to stay put:  If you move out of your dwelling, you will be required to pay the loan back.  In many cases, this means you will be left with nothing for a down payment and will not be earning anything on the sale.  You should not be planning to move again.
  • The older the better:  The older you are, the more money you will be able to collect on a reverse mortgage.  Conversely, the younger you are, the less worthwhile a loan like this will be.   

What are the options?

When some people think of reverse mortgages, they think of the homeowner getting paid a monthly sum while living in his or her house.  However, it is also possible to get a lump sum payment, a line of credit, monthly cash advances, or a combination of these.  The sort of loan you accept will depend on your individual needs and requirements.

What do I need to know?

Of course, you need to know what sort of payments you will receive, as well as how your interest will be structured.  You can choose an adjustable rate that fluctuates at various intervals, or a flat rate that remains stable.  You also need to realize that the longer you have the loan, the less equity will remain in your property.  This means that, if you were counting on willing the proceeds from your house to any heirs, they may be left with almost nothing. 

Despite these warnings, reverse mortgages can still be great options for retirees who need cash.  Do your research, check with trusted financial advisors, and read all the disclosure documents before signing anything.  Investing your time now will make for a better investment in your future.


Uses for a Home Equity Loan:

  Finance Rennovations
    A second mortgage can allow you to repair or improve your home to make it more comfortable or to increase its value before a sale.
  Pay for College
    Use the equity in your home to put your adult child(ren) through higher education.
  Consolidate Your Debt
    A home equity loan can help you combine your credit card and other debt so that you are paying lower interest rates on what you owe.
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