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Reverse Mortgage – Be Sure You Need It Before Applying For One
By: Charles Essmeier
Reverse mortgages used to be considered the last resort of desperate retirees
who needed to borrow against their home equity in order to pay for medical
expenses. With home prices across the country rising at astonishing rates, more
and more retirees, aged 62 and over, are taking out reverse mortgages to fund
better retirement living. A reverse mortgage works more or less the opposite way
from a conventional mortgage; the borrower receives payments from the lender in
the form of a lump sum, a line of credit, or monthly payments. The amount
borrowed constitutes a lien against the home must be repaid upon the death of
the borrower, or when the home is resold. There are costs associated with a
reverse mortgage, however, and potential borrowers should be aware of these when
considering taking out such a loan, particularly if the borrower takes out a
line of credit.
All loans have fees associated with them. There are home appraisals, paperwork
fees, mortgage insurance fees, and additional “points” added to the cost of the
loan. In general, the costs of taking out a reverse mortgage are higher than
those associated with a traditional mortgage. There are several reasons for
this, including the fact that the time period for receiving repayment of the
loan is indefinite, typically depending on how long the borrower lives. This
uncertainty is added into the loan in the form of additional fees.
Most people who take out a reverse mortgage opt to take their funds in the form
of a line of credit, rather than a lump sum or monthly payments. There are
advantages to a line of credit, which allows the borrower to use the funds by
simply writing checks against the loan. The primary advantage is that the
borrower only uses the funds when he or she needs them. Because of this,
interest only accrues on the money if the borrower actually writes checks.
Borrowers should be aware, however, that the costs of the loan, which can be
substantial, apply even if the borrower doesn’t write any checks against the
loan. If the homeowner takes out a line of credit and decides to sell the home
shortly thereafter without ever having written a check against the loan, the
borrower will not owe the lender any interest or principal, but the borrower
will lose the money paid for the cost of the loan, which is not refundable. If
the borrower rolled the costs into the loan itself, they could owe payments even
if they never wrote a check.
In short, borrowers considering taking out a reverse mortgage should make sure
that they plan to stay in their home for quite some time and that they actually
need the money from such a loan. A reverse mortgage is a great idea for those
who have a specific purpose or use in mind, but as an emergency source of “rainy
day” funds, it can be an expensive choice.
About the Author:
©Copyright 2005 by Retro Marketing. Charles Essmeier is the owner of Retro
Marketing, a firm devoted to informational Websites, including
http://www.End-Your-Debt.com , a Website devoted to debt consolidation
information and
http://www.HomeEquityHelp.net , a site devoted to information on
home equity loans.
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