Is A Reverse Mortgage Right For You?

Pretty much everyone knows how a traditional mortgage works.  The bank loans you money so you can buy a house and then you slowly pay them back (plus a lot of interest) over the course of around 30 years.  But relatively few people have heard of reverse mortgages, and even fewer actually understand how they work.  Could a reverse mortgage be the answer to your financial problems?

A reverse mortgage allows you to access some of the equity you have tied up in your home.  You can then use the money to pay off your existing mortgage, make repairs or improvements on the home, pay medical bills, or just about anything else you can think of.

If you think that sounds a lot like a home equity loan you’re not far from the truth.  But despite their similarities there are some rather significant differences too.

First of all, in order to be eligible for a reverse mortgage you need to be age 62 or older.  Reverse mortgages are intended to help cash-strapped seniors who are struggling to cover all of their expenses so they can remain in their homes.  There are no age restrictions with a home equity loan.

Secondly, to be eligible for a home equity loan you need to demonstrate a steady income and a healthy credit score.  But there are no such requirements with a reverse mortgage (I’ll explain why in just a second).  As long as you have equity in your home and meet the age requirement you can qualify.

No credit checks are required for reverse mortgages because there are no monthly payments to make.  In fact, you don’t have to pay it back at all until you either die or move out of the house.  The loan is typically paid back when the house is sold by your estate or your heirs.

Now you might be reading this and thinking, “Wow!  I can get a boatload of cash from the bank and I don’t have to worry about paying it back until I die?  Where do I sign?”  But there are some reverse mortgage pitfalls you need to consider before you agree to anything.

Closing costs for a reverse mortgage can be pricey.  And while some lenders will allow you to roll those costs into the loan balance, that will only decrease your equity further.  Plus, since you are not making monthly payments to pay down the loan, the balance will actually increase more and more and you could wind up with no equity in the house at all.

That would be a big problem if your circumstances change and you want to move.  If you sell the house the reverse mortgage comes due, and you might not have enough money left over to find a new home.

Another consideration is your heirs.  You’ve probably worked hard and spent many years paying down your mortgage with the intention of leaving your home to your children or grandchildren.  But if there is a reverse mortgage that needs to be repaid your children will most likely have to sell the house to raise the funds.

If having something to leave to your heirs isn’t a concern then a reverse mortgage might be worth considering.  But if you’ve always dreamed of passing your home down to future generations then you may want to think twice before signing on the dotted line.