Is a Reverse Mortgage Right for You?

Many senior citizens are jumping at the chance to obtain a reverse mortgage to tap into their home equity. The National Reverse Mortgage Lenders Association says more than 112,000 reverse mortgages were sold in 2008. And a study by AARP found that most seniors who took out a reverse mortgage were glad they did. But before you sign up for this type of program, it’s important to know exactly why you think you need a reverse mortgage.

If you’re 62 or older, a reverse mortgage can allow you to tap into your home equity tax free. Reverse mortgages don’t require a good credit score. In fact, borrowers with blemished credit pay the same rate as those with perfect credit. Depending upon the program you could receive a lump sum, a line of credit, or monthly payments. Also, the money won’t have to be repaid until you sell your home, stop living in it, or die.

Reverse mortgages do come with fees. HUD’s HECM also comes with mortgage insurance. While these fees aren’t as high as those associated with selling your home, they are substantial. In general, you can minimize the effect of up-front costs if you stay in the home a long time. If leaving an unencumbered home to your heirs is important, keep in mind that a reverse mortgage can deplete the equity from the home.

Here are some questions AARP recommends you consider before signing up for a reverse mortgage:

—Why do you want a reverse mortgage? Do you need to money to help pay your monthly bills or are you looking to make a major purchase, such as a vacation or car? In general it’s not advisable to use long-term financing for short term items.
—Can you afford the reverse mortgage fees?
—Do you have enough equity in your home for a reverse mortgage? The troubled housing market has seen many people stripped of much of the equity in their homes.
—Is there another way you can borrow the money you need, such as a home equity line, which might actually cost less in the long run? For smaller amounts, home equity loans are preferable.
–How is your credit rating and income? If you have credit problems or insufficient income, a reverse mortgage may be the cheapest (or only!) option available to you because there is no credit qualifying and you don’t make any payments.
–How long will you be in your home? If you plan on a two-year jaunt around the word, a reverse mortgage is not for you. Ditto if you have serious health issues. More than one senior has returned home after a few months in a hospital to find their home in foreclosure. Just make sure you understand what the lender means by “occupying” the home before you sign.

If you believe feel that a reverse mortgage is right for your situation, make sure you understand exactly how it will work. Choose a reputable lender who doesn’t try to cross-sell other products such as annuities. Getting quotes from several lenders and learn how to compare the disclosures.

This entry was posted on Friday, March 27th, 2009 at 12:50 pm and is filed under Reverse Mortgage . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.