A reverse mortgage is a financial instrument that allows homeowners to borrow money against the value of their home without repayment of the loan until the borrower dies or the residence is sold. While no payments on the loan are due, homeowners must stay current on property taxes and insurance or risk defaulting on the reverse mortgage.
In the United States, homeowners must be at least 62 years old to qualify for a reverse mortgage. Typically, reverse mortgages are utilized by seniors as a retirement plan, supplement to social security, or for unexpected expenses such as medical bills or even home improvements.
While reverse mortgages can be attractive, and are often the best option for many people, there are some downsides that should be noted.
Reverse mortgages can be expensive. There are typically high up-front costs associated with reverse mortgages, and the interest rates on these types of mortgages may be higher than a traditional home loan.
Also, because there is no payment being made on the principal or the interest of the mortgage, the resulting compound interest can deflate the equity in the home much quicker than with a traditional mortgage.
Finally, reverse mortgages can be confusing and some less than scrupulous lenders may seek to take advantage of seniors for whom this may not be the best option. If you think that a reverse mortgage may be right for you, make sure to do your homework and feel comfortable with the entire process before committing yourself to anything.
