Advantages of Reverse Mortgages

As people move into retirement, it's important to keep their financial options open.  Having a financial lifeline for emergency expenses, or even for the everyday luxuries, such as vacations, new vehicles, and trips to the mall can mean the difference between a happy retirement and a retirement of drudgery.  A reverse mortgage is the one financial product that allows a retiree to have access to their home's equity, put it to work, and use the money however they want, without ever having to make a payment. 

With a reverse mortgage, your home is yours to live in as long as you want.  Lenders allow you to keep the loan as long as you're using that as your primary residence.  There is no monthly payment, and depending on the type of reverse mortgage you opt into, you may never make a payment as long as you live.  Reverse mortgage funds can be used for any reason, and there is no limit to what you can do if you have the financial backing to do it.  The disadvantages of a reverse mortgage, however, may be the ease with which it can be obtained.


What Happens After You Get A Reverse Mortgage?

Reverse mortgages differ from standard mortgages in that there is no monthly payment.  This means that as long as you want to live there, you can.  You can choose to never make a payment on your loan, and enjoy the money however you like.  As long as you are using it as your primary residence, reverse mortgage lenders have absolutely no claim on your home or your property. 

Many people choose a reverse mortgage over a regular home equity loan.  Home equity loans typically have higher interest rates, and payments must be made monthly, like clockwork.  If you miss a payment, they can foreclose on your home.  However, with a reverse mortgage, the loan balance isn't due until your death, or until you're no longer living in your house.  You can't be forced out. 


Why Are They a Better Investment Than Standard Mortgages?

The loan repayment value is never more than the value of your home.  Mortgage lenders, regardless of the amount of money they have lent you, cannot require that you pay back more than your house is worth.  This means that regardless of what the market does, you'll never be "upside-down" in your home.  While the market value of your house may fluctuate, your ability to pay doesn't.  Even if you pass away still owing on the reverse mortgage, the value of your home will satisfy the loan in full.

In other words, you can never owe more than the value of your house.  Even if the mortgage lenders have paid you significantly more than market value in loans, they cannot recoup more than the resale value of your house.  This is a major advantage when you consider the volatility of the market.  A sudden market downturn won't cause you undue financial harm if you have a reverse mortgage.


Who Should Consider A Reverse Mortgage?

Reverse mortgages are available for people who are aged 62 and older.  When looking forward to retirement, it's daunting to know that you may not have enough saved to live life to its fullest.  With a reverse mortgage, you can access your home equity, regardless of your past financial situation, health, or income.  The money is yours to use however you want.  A reverse mortgage is ideal for increasing retirement income while lowering expenses.  You can even use a reverse mortgage to pay off a standard mortgage.  This eliminates the monthly payments to which you are accustomed and allows you to properly fund family outings, educational expenses, or health expenses, as well. 

What's The Catch?

The fact is, there is no "best way" to fund your retirement.  Many financial analysts direct seniors away from the dangers of reverse mortgages, touting the reverse mortgage pitfalls.  They say, for example, that it affects the inheritance of their heirs.  What most people don't realize is that their heirs certainly have the ability to continue their interest in your home after your passing.  They simply have to either pay off the reverse mortgage, or refinance it with a new loan to cover the balance owed.  The reverse mortgage pitfalls are certainly serious, but they are far from the devious financial products that many analysts portray.  The only major disadvantages of a reverse mortgage are that it is viewed with such contempt by many financial planners.  

There are, however, a few legitimate reasons to be leery of a reverse mortgage.  One of the major reverse mortgage pitfalls is the high closing cost.  This may amount to a significant amount of money.  One of the dangers of reverse mortgages is that they aren't recommended for someone who plans to stay in their house for less than 5 years.  If you don't plan to stay in your home for longer than that, a reverse mortgage may not be your smartest investment.  The closing costs and fees can eat up a great deal of your equity.  Of course, with interest rates dropping all the time, investing in your home has never been a more lucrative opportunity.  The dangers of reverse mortgages are often far outweighed by their advantages.  Of course, as always, do your research.  A proper investigation will yield both the advantages and disadvantages of a reverse mortgage. 

How Are Reverse Mortgages Resolved?

With a reverse mortgage, the homeowner can never lose their home.  The only way the house can be sold is if the homeowner decides to sell, or if they die.  Of course, if they can't live in the home for a period of time greater than one year that may trigger a sale, as well.  In the event of a sale during a bad market, you can never be left owing money.  If you sell the house, and the sale price isn't enough to cover the amount owed, the mortgage insurance will pay the difference.  This means that your loved ones will not be financially responsible if the market causes your house to decrease in value.