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The Benefits and Risks of Getting a Reverse Mortgage

By E Singer
Jan 2nd, 2013

reverse mortgage benefitsReverse Mortgages can often prove to be very helpful to older citizens who are short on cash, but these loans also carry with them many pitfalls.

Before we go into the pros and cons of reverse mortgages, let’s take some time to first understand what makes reverse mortgages unique. A reverse mortgage is a type of home loan that allows homeowners to convert a certain portion of their home equity into cash.

This has the effect of turning your house into an impromptu visa card with a line of credit. Instead of paying the bank every month on a home loan, the bank sends you a check for essentially borrowing against the value of your house.

Reverse mortgages are available to all homeowners provided that they are 62 years of age older and have enough equity in their home. They have become popular among many older homeowners who are either in or nearing retirement and looking for some extra cash to supplement their income.

These types of loans are different from traditional loans in a few key ways. First, you have to actually live in the home you are looking to get a reverse mortgage for. Investors looking to tap the value of their suite of homes in Manhattan through multiple reverse mortgages need not apply.

Second, one of the main benefits of this type of loan is that you don’t have to begin to pay it off immediately. You only have to begin to make payments when you no longer use the home in question as your principle residence.

In the event that you want to leave your house to an heir after procuring a reverse mortgage, it is possible to transfer the remaining equity on the home to them. However, once the home is bought or sold all of the cash, interest and other finance charges must be repaid.

One of the most obvious pitfalls of taking out a loan for a reverse mortgage is that you could potentially lose your home. If you decide to move from your home, then the bank can take possession of the home provided that you don’t make the payments on the loan.

These loans may also affect the eligibility of the borrower to qualify for future types of loans. Moreover, even though the debt of the reverse mortgage cannot be automatically transferred to heirs, it may affect the inheritance of the borrower’s heirs. And finally, the borrower of the loan may potentially lose their eligibility to qualify for certain government programs like Medicaid and Supplementary Security Income.

Taking out a reverse mortgage is no small matter. And lenders that deal with reverse mortgages are required by law to give you access to speak with a credit counselor designated by the Federal Government.

Still, even with the credit counseling required by law, this has not eradicated predatory lending practices which aim to beguile even the most fiscally responsible seniors. Knowledge of the law and the potential risks of reverse mortgages must first come from consumers.