As you head into your retirement years, you need to figure out how to generate income. Reversing your mortgage is one option that has become popular, but is also very controversial. The reverse mortgage is exactly what it sounds like. Instead of you making payments to a lender, the lender makes payments to you. While that may sound fantastic, the similarities pretty much end there. The reverse mortgage is based on the equity in your home.
Every time the lender makes a payment to you, it gets a bit of your equity. This equity is held as debt like in a traditional mortgage and interest is charged on the amount. The first issue that arises with this program is the issue of finite equity. Practically speaking, what happens if you outlive the equity in your home? Does the lender take over the home and kick you to the curb? This is exactly what happened when these loans were first offered. This unsavory result did not stand.
The federal government got involved. In most current situations, you are allowed to remain in the home, but payments to you stop. Another common question is how big will the monthly payments made by the lender be? There are a number of factors that go into the determination. These include the amount of equity in your home, the interest rate charged on the loan, the costs and the fees. Finally, the biggest factor is the particular plan you choose. You will have a choice of different options that produce different payments and so on.
The situation is similar to the one in which you decide upon a mortgage for a home you buy. At some point in time, you might realize a reverse mortgage is not for you. Can you get out of it? Generally, you can so long as you pay off the mortgage debt.
Make sure to read the loan documents for language on this issue. Real estate is beautiful because it appreciates most of the time. After getting a reverse mortgage, can you still tap this appreciation? The answer is usually yes, but you may have to refinance the property to do so. So what happens when you reach the end of the line? In such a situation, the home is handled just like one with a traditional home loan. Your heirs will either sell it or come up with the money to pay off the reverse mortgage. The reverse mortgage is undoubtedly a new toy in the loan industry.
That being said, it is very expensive. For a majority of people, it is a bad choice compared to other alternatives that are cheaper and produce more income.
Barry Waxler is a financial advisor with UFCAmerica.com.
