The reverse mortgage is a trend that seems to be hitting homes all over the country. And it's happening at the same time that housing prices are soaring and interest rates are at their record lows. Let's take a look at the reasons why despite the bad publicity that reverse mortgages had, they have managed to stay in the industry all these years to become the "in" thing for many borrowers today.
Once branded as predatory loans that took advantage of defenseless older people, the reverse mortgage took more beating when it was embroiled in scandals. But in the last decade, it has earned more credibility after legislation required more upfront disclosures of costs.
A reverse mortgage is a mortgage product specially designed for homeowners aged 62 and older. Through this product, seniors can receive a loan against their home in the form of a lump sum, regular monthly checks or a line of credit. The loan is typically repaid with interest when the borrower sells the house, permanently moves, or dies.
Here are some of the reasons that borrowers resort to a reverse mortgage.
Pay Traditional Mortgages - Homeowners use a reverse mortgage to pay down their remaining debt on their traditional mortgages and use the remainder to fund other retirement costs.
Unaffected Ownership - When the loan is accepted, the ownership of your house is not affected and you will still retain title to your home.
- The majority of the costs are paid for through the reverse mortgage loan.
Date - Compared to a traditional home equity line of credit, a reverse mortgage allows debt payments, including interest and other costs, to be stalled until a later date, typically when the owner dies.
Prices - The debt can never go beyond the value of a home at the time that the loan is already repaid. This means that when soaring housing prices begin to drop, borrowers won't be held responsible for paying back a higher amount.
However, as more people become informed of the potential benefits that the reverse mortgage offers, they should also become aware that it has negative aspects.
Rate Variability - A reverse mortgage tends to be a variable rate mortgage loan that entails substantial front-end expenses to compensate for expenditures if ever the borrower exits early.
Older Borrowers Means Higher Prices - The loan will be bigger for pricier homes and older borrowers.
Complicated - According to advocates and financial planners, a reverse mortgage can become expensive and complicated. Therefore, seniors who are interested in applying for a reverse mortgage should first learn how it works. Before they look for a lender, they should be ready to receive independent counseling.
Higher Rates than Credit - Borrowers who choose to take the lump sum are slapped with higher interest payments compared to those who settle for installment checks or a line of credit. The reason for this is that, with the two latter choices, interest is only computed on the portion used.
While financial planners recommend that seniors only take a reverse mortgage if they plan to stay longer in their homes, evaluating the product's options may still be confusing. Before you apply for a reverse mortgage loan, make sure that you get impartial counseling first to help you decide if the product is right for you.
