Is a Reverse Mortgage Right for You?

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Author: Leslie Silver

The idea of a reverse mortgage has gained a great deal of attention in recent years. Many retirees have found them to be an ideal way to enjoy an additional source of income that helps to stretch pensions and other types of nest eggs that were built up over the years. However, a reverse mortgage is not necessarily the answer for everyone. Here are some questions to ask if you are thinking of entering into this type of arrangement.

First, it is important to make sure you meet the minimum age requirements for a reverse mortgage. There are few if any lenders who will underwrite this type of loan situation unless you are at least sixty-two years old. Some also require that you be officially retired before they will consider you for a loan. For example, you may be sixty-two or older, but if you are still working full time, there is a good chance you will not be eligible for the reverse mortgage.

Another important consideration is the value of your home. Most people understand that the property must be completely free of any type of obligation. There cannot be a mortgage on the home at the time you apply, nor can there be any type of lien pending on the property. One of the factors that determine the amount of the reverse mortgage loan you can receive depends on the total market value of the home. Unless you are the sole owner and the property is free of debt, most lenders are not willing to assume the risk.

Keep in mind that a reverse mortgage shares many of the same characteristics as any type of loan involving property. In other words, there will be closing costs that must be paid. It is extremely difficult to find lenders who are willing to waive or otherwise absorb the closing costs. That means you must be in a position to cover those costs yourself. In most cases, closing costs cannot simply be deducted from the face value of the reverse mortgage loan. Talk with lenders about how long it will take after the closing costs are paid to be able to receive your first disbursement from the reverse mortgage. You may be able to secure a short-term loan to cover the costs, and pay it back in full once the funds from the reverse mortgage are available.

Another point to consider is the rate of interest associated with the reverse mortgage loan. While this is not always the case, the interest rates on loans of this type are usually higher than the rates on other kinds of loans. Depending on how you plan to receive the funds from the arrangement, a significant amount of interest can accrue over the life of the loan. Before committing to anything, make sure you understand when the interest is applied and compare that to your projections of how you want to receive disbursements. Ideally, you want to make sure that the total principle of the loan plus the interest does not exceed the market value of your home.

There are essentially three different payment plans that are associated with reverse mortgages. One approach is to receive the full amount in one lump payment. This can be helpful if you plan on placing the funds in some type of interest bearing account and withdrawing the money when and as you need it. A second approach is to establish a line of credit. With this solution, you draw on the available funds when and as you need them. You can also set up a schedule of monthly payments; this approach is a good idea if you need a steady source of income to augment your pension each month. Before you settle on any one of these options, make sure the terms of the mortgage agreement allow you the option of amending your choice from time to time; doing so will help to ensure that as your circumstances change, your reverse mortgage arrangement can change right along with you.

While people tend to focus on the reception of a regular stream of income, it is also important to look closely at the terms of repayment associated with the loan. There are some stipulations that must be met in order to avoid the necessity of making monthly payments on the amount you’ve received from the reverse mortgage. Many lenders will not require that you begin repaying the loan as long as you live in the residence. However, this does not prevent you from making payments when and as you like. This is often a point worth considering, since it will reduce the interest you accrue on the principle. Once you are no longer residing on the property, any outstanding amount, including interest, will be due. If you’ve kept the amount due down to a minimum, it may be possible to convert to a standard mortgage and retire the debt. Otherwise, the property will have to be sold in order to satisfy the terms of the reverse mortgage.

Reverse mortgages work very well for some. However, others find that the interest, payment schedules, and other factors create more problems than the loan will solve. Before you commit to this type of loan arrangement, weigh all your options carefully. Your decision will make a real difference in the quality of life you enjoy during your senior years.

Leslie Silver is a freelance writer who offers suggestions about how to get a reverse mortgage.