Reverse mortgages come with some caveats

While they have their uses, not everyone is ideally suited to a reverse mortgage

The lending industry is an aggressive one, and if you have a need, they will try to find a loan to fill it. It’s all about selling as many loans as possible, and that’s just fine if they have a loan that meets your needs exactly. But buyers should watch out to make sure that the loan the lender is trying to sell them is the loan they need, and not just the one that the lender wants to sell. He or she gets a commission whether the product is ultimately in your best interests or not.

One product that is all the rage these days is the reverse mortgage. It’s a great product, but only in certain, specifically defined situations. The owner or owners must be 62 years of age or older, and the house should be free of liens. If that’s the case, then a reverse mortgage can provide certain benefits. 

A reverse mortgage is aptly named; it works like a regular home loan, but backwards. Instead of sending money to the lender each month, the lender pays you. You can take monthly payments, a lump sum payment, or a line of credit that lets you take the money only as you need it. If you elect to take payments over time, that length of time can be pre-established or you can take smaller payments for the rest of your life. Of course, should you die, sell the home, or move, the cash flow stops, the house has to be resold, and the lender needs to be repaid.

For older homeowners who may be equity-rich but cash poor, a reverse mortgage can be a solution to cash flow problems. Those considering such a loan do need to be advised that there are some downsides, as their is no such thing as a perfect home loan. Some are sound, and others are more risky, such as the accelerator mortgage.

Among the things that should be considered:

• The fees are high and are much higher than for other types of home loans. Closing costs can easily run in the $6000-$10,000 range, and they often include monthly fees for managing the loan.
• You lose equity. After all, your equity in the home is what you are selling. If you take the maximum amount of money available to you , you have essentially given up all of the equity you have earned over the years. In fact, you effectively no longer own your house. The bulk of the value will belong to the lender. If you are concerned about leaving something to your heirs, this may not be the loan for you, because after you die, sell or move, the home gets sold and the proceeds go to the lender.

For some people, a reverse mortgage is perfect. For others, it’s a bad idea. Anyone who is considering such a loan should first look at all their other options, including home equity loans and lines of credit. You should also talk to a tax professional and perhaps a financial advisor, as well. Most people who are 62 or older have a substantial investment of time and money in their home. You don’t want to frivolously sign it away. You want to make sure that the decision that you make regarding your property is a sound one.