What is a Reverse Mortgage? What are the Pros & Cons?
What is a Reverse Mortgage? Recently I was asked this very same question “what is a reverse mortgage” by a friend at a party. Then I received a couple of e-mails praising the benefits of a reverse mortgage. Then I watched Robert Wagner doing a commercial about Reverse Mortgages. I guess it was an omen for me to tell you what it is.
With that said: It is a special type of loan, used by many “older” Americans in converting the equity of their homes into cash. This can be accomplished by issuing a loan to the home owner, but the owner does not make payments on the loan. Instead the homeowner may receive a line of credit for some portion of the equity or an annuity like payment that will be guaranteed for life.
So how does this work? A first position lien is placed on the property. The loan is never paid off; instead the balance continues to grow, month after month. Upon the passing of the homeowner, the mortgage company takes possession of the house unless the heirs repay the debt.
So what are the pros? One of the benefits is if the homeowner is at or near retirement age, instead of struggling to make ends meet due to the mortgage payment can get relief. The home owner can use the equity of their home as a retirement fund without having to sell and downsize.
So what are the cons? The most important one is higher than normal mortgage rates. Generally the loan is 1-2 per cent higher. The loan origination fees are higher as well.
This is just scraping the surface. Since it is such an important issue, I will give more details about this very important subject in a follow up blog.
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