Issues to Consider with Reverse Mortgages

A red hot loan package that is getting a lot of attention these days is the Reverse Mortgage. Common question arise regarding the loan, so let's take a closer look.

As the name suggest, this is a loan wherein you receive payments from a lender instead of making them. The rest of the loan, however, is much different than your run of the mill mortgage.

The Reverse Mortgage is based on the equity in your home. Every time the lender makes a payment to you, it gets a bit of your equity. This equity is held as debt like in a traditional mortgage and interest is charged on the amount.

The number one question regarding Reverse Mortgages has to do with equity. Specifically, what happens if the equity is all used up before the borrower dies or the home is sold? Do you lose the home, get foreclosed on or what?

In the past, the ugly answer is that you would lose the home. Since senior citizens sitting on a curb did not go over well, the government stepped in. Most plans now allow you to stay in the home even if the equity is used up entirely.

Considering you are giving away a big chunk of your nest egg, you should get some sizeable payments, right? Well, maybe. There are a lot of factors involved. These include the dollar value of your equity, your age and so on.

If this sounds too vague to you, don't worry. One of the biggest factors is the program you choose. There are different ones offering different payment amounts. You can even take lump sum payments in some cases.

What happens if you realize you should have gone in a different direction? Can you refinance your home to get out of the loan? Yes, so long as you pay off the amount due on the Reverse Mortgage. Make sure to check the fine print for prepayment penalties.

Another issue that arises is appreciation. What happens if your home appreciates over time? Can you get at the new equity? In most cases, you can. Whether this has to occur through a refinance or a modification to the Reverse Mortgage is a case by case decision.

So what happens when you reach the end of the line? In such a situation, the home is handled just like one with a traditional home loan. Your heirs will either sell it or come up with the money to pay off the Reverse Mortgage.

The Reverse Mortgage is often touted as a great way to pull income from real estate. In truth, it is a very expensive method for doing this and there are better options. Make sure to speak with a financial advisor before going this direction.

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