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.

As payments are made to you, more and more of the equity in your home is converted into debt. That debt grows at an interest rate that is typically one to two points higher than a normal mortgage or refinance.

The first issue that arises with this program is the issue of finite equity. Practically speaking, what happens if you outlive the equity in your home? Does the lender take over the home and kick you to the curb?

This is exactly what happened when these loans were first offered. This unsavory result did not stand. The federal government got involved. In most current situations, you are allowed to remain in the home, but payments to you stop.

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.

Many wonder if they can tap additional appreciation as time passes. If you home grows in value, the answer is you can. Frankly, this is an area that has not seen a lot of action given the relative newness of reverse mortgages.

What happens when I die? The reverse mortgage is handled no different than any of your other assets. It becomes due. This means your heirs must either pay it off or sell the property. If they sell the property, the reverse mortgage balance is paid off.

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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