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A reverse mortgage is a non-recourse loan
secured by a house. Unlike a conventional mortgage
that decreases over time, a reverse mortgage increases
over time. It can be used as a form of mortgage
debt consolidation. The amount that the borrower
can borrow is based on the value of the home, interest
rates, and the age of the homeowner. Older homeowners
can borrow more than younger homeowners, since it
is assumed that the reverse mortgage will be repaid
sooner.
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Reverse mortgages are designed for older
homeowners who are "house rich, but cash poor."
With a reverse mortgage the homeowner borrows
money, but does not have to repay it as long
as they live in their house.
Each month interest is added to the principal
amount of the loan, and when the homeowner moves,
they either repay the loan, or the house is
sold and the proceeds go to the reverse mortgage
lender
To qualify for a reverse mortgage, the borrower
(and their spouse if married) must be 62 years
of age or older, and they must own their primary
residence, which will serve as security for
the loan.
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What are the advantages of a reverse mortgage?
The advantages of a reverse mortgage are:
- the borrower can remain in their home, allowing
them to remain independent;
- the proceeds from the reverse mortgage are generally
tax free -reverse mortgages are flexible; payments
can be received as a lump sum, or as monthly payments
for life.
- no repayments are necessary as long as the homeowner
lives in the home.
- in most cases reverse mortgage proceeds will not
affect regular Medicare or Social Security benefits
- the borrower's credit rating doesn't matter; only
the value of the home is important.
- no payments are required as long as the homeowner
lives in the house.
- it's a good way to unlock the equity in a house,
to allow the homeowner to remain in their house.
- the proceeds from the mortgage can be used for
any purpose.
- reverse mortgages are non-recourse, so even if
house prices drop in the future, or interest rates
increase, the homeowner cannot be forced from their
home.
If paying down a mortgage makes sense,
why would you want to use the home equity you have
built up to increase your mortgage with a debt consolidation
loan?
What are the dis-advantages of a reverse mortgage?
The disadvantages of reverse mortgages
are that: -
- reverse mortgages are much more expensive
than traditional mortgages
- when the home is sold, it is possible that there
may be no equity remaining, so heirs may not realize
anything from the sale;
- reverse mortgages are a form of debt; many older
people want to avoid debt, particularly as they
get older;
- reverse mortgages must be paid off upon the death
of the homeowner, or if the borrower has not lived
in the home for 12 months. This could be an issue
if the borrower is placed in a nursing home and
then recovers, only to find the home sold.
- While regular Social Security and Medicare benefits
are not affected, other programs such as Medicaid
and Supplemental Security Income (SSI) may be affected.
- there are significant up front costs, so reverse
mortgage are generally only a good idea for people
who intend to live in their homes for at least five
years
- since the proceeds can be used for any legal purpose,
it is important that the borrower does not use the
proceeds for frivolous purposes, like unnecessary
vacations or other items.
If you have a lot of debts, like credit cards, a
reverse mortgage could be used as a form of debt consolidation
to repay those debts.
However, a reverse mortgage debt consolidation
loan isn't for everyone. You must be over 62 years
of age, own a home with some home equity, and you
should plan to live in your home for at least another
five years.
It is important to research your options and decide
if a reverse mortgage is right for you.
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