Money Talks: Is a Reverse Mortgage Right For You?

It's common for retirees to have a low monthly income. But many also have a high net worth, because they own their home outright. That's why many older people are prime candidates for reverse mortgages.

What's a reverse mortgage? The payments on this type of loan are reversed. You're essentially borrowing against your house, but instead of you making payments every month, you get checks every month. Then when you die, or sell the house, the loan, along with all the interest that's built up, is paid back to the lender.

The borrower must be at least 62 years old and, in general, the borrower must receive counseling or consumer education before taking out this type of loan. The Federal Trade Commission says, "Knowing your rights and responsibilities as a borrower may help to minimize your financial risks and avoid any threat of foreclosure or loss of your home."

A reverse mortgage doesn't have to be repaid until the death of the last surviving borrower, the sale of the home, or a permanent move out of the home by the borrower. And the home doesn't have to be sold to repay the loan. The loan can be repaid using other sources of funds and the home can be kept, if the heirs desire.

Here are the types of reverse mortgages:

  • Home Equity Conversion Mortgage (HECM)

  • Fannie Mae Home Keeper

  • Financial Freedom Equity Guard & Cash Account Plan

The Federal Trade Commission has an online brochure that explains reverse mortgages as well as the features of federally insured, privately insured and uninsured loans. And, for a cursory look at the reverse mortgage process, here's the pamphlet on reverse mortgages, published by the National Reverse Mortgage Lender's Association.

So the idea of a reverse mortgage is to increase your income now by tapping your home equity. And it can be a good solution, but then again, maybe not.

See, reverse mortgages can cost more to set up than typical mortgage loans. They can have higher interest rates. And since the interest is accumulating rather than getting paid every month, there's no tax deduction until the loan is paid off.

For many people, a plain old home equity loan may be a better plan. These often have no set-up fees, lower rates, and a tax deduction. But here you do have to make payments, and the length and terms of the loan can be less flexible.

Which is better? Either, or neither, could be. This is a situation where you really need to visit with an independent professional to compare options. You can search for such a professional in your area by clicking here.

Don't make a move in either direction until you do weigh the costs, benefits and drawbacks and your other options.

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