Reverse Mortgage Pros and Cons

Charley — Tue, 08 Sep 2009 09:16:24 +0000

A reverse mortgage is approximately what its name implies. It is money given by a bank or lending institution to a home or property owner in exchange for a lien on, and eventual ownership of, the home or property. A normal mortgage releases the property to the homeowner at the end of the mortgage, whereas at the end of a reverse mortgage the ownership of the property transfers to the bank. However, there are a few caveats:

Reverse mortgages are typically only available to seniors. Reverse mortgages are products specifically intended to give income or cash to a person at the end of their life.

There are caps on the value of reverse mortgages. Most countries have some type of cap on money payable on a reverse mortgage. This is not a concern for most home owners as the cap is in excess of their home’s property, but can seriously affect people who own valuable homes.

It is difficult to predict the worth of a reverse mortgage. Because the approximate value of the mortgage depends literally on how long it takes until you die, it is difficult (and can be emotionally painful) to determine the value of a reverse mortgage.

With all of that said, there are some very definite reverse mortgages pros and cons:

Pros

A reverse mortgage provides much-needed income to a person at the end of their life. Many people own their home outright but do not have significant savings to cover the costs of retirement. A reverse mortgage can provide the funds needed to live comfortable at the end of your life.

A reverse mortgage can provide more money and be more comfortable than selling your home and buying a smaller place or renting. Most seniors express little or no desire to move, and a reverse mortgage may be the answer to being able to stay in your home for the rest of your life.

Cons

A reverse mortgage can end up being expensive. Though there are typically no costs for a reverse mortgage, interest (yes, the bank does charge you interest), up front fees, and broker percentages can mean you get much less money than you anticipate. Additionally, if you wish to receive a lump sum payment rather than fixed income, the bank will apply a steep discount to the funds available. It does not hurt to consider a reverse mortgage, but if the terms are unacceptable to you there are always other options.

You will lose ownership of your property. Receiving a reverse mortgage means you will transfer ownership of your property to the bank once you move or die. If you were planning on leaving your home to your children, this is quite obviously a problem.

Ultimately, you will have to make a decision based on your own unique situation. There is no sense on sitting on your home’s equity near the end of your life, but a reverse mortgage will not always be the ideal option.

All About Finances » pros and cons of a reverse mortgage

Reverse Mortgage Pros and Cons