Is a Reverse Mortgage Good or Bad?

Reverse mortgages are designed for seniors who are 62 years or more in age. These mortgages enable the seniors to borrow money against their homes. The borrower does not need to pay any installments until her death or until the time she sells the house, whichever is earlier. The monies from the reverse mortgage may be obtained as a lump sum or spread over several periods. There are both pros and cons to reverse mortgages.

Costs

Reverse mortgages are costlier than other traditional mortgage types. The money repaid by the borrower far exceeds what he initially borrowed. Costs of insurance, taxes, service charges and interest keep compounding on the amount borrowed. These costs grow until the death of the homeowner. This type of mortgage works best for homeowners who do not wish to leave the home behind to their heirs. Otherwise, the heirs would have to clear a lot of dues before gaining the title to the house.

Possession of the House

The plus to a reverse mortgage is that the borrower still enjoys all the benefits from the house as he did earlier. He retains the possession of the house and the title on it. From the reverse mortgage monies, he can pay off his other financial commitments, including other outstanding loans and the previous mortgage on the house. Reverse mortgages are provided only to seniors. These seniors are usually retired and do not have employment income. With this money, they are able to meet their financial obligations and put aside some money for their expenditures.

Mortgage Criteria

There some criteria that need to be fulfilled before applying for a reverse mortgage. Only single-family homes or 1- to 4- unit dwellings are considered for reverse mortgages. In 1- to 4-unit dwellings, at least one unit must be owner-occupied. The amount on the previous mortgage must have been totally repaid or a very small sum must be outstanding. The income or the credit score of the borrower have no bearing on the mortgage amount. As the loan is provided against the house, these factors are not considered.

Associated Costs

Though no repayment is made during the lifetime of the borrower, there are some costs that she will incur. She must pay origination costs to start with the mortgage proceedings and an appraisal fee to determine the worth of the house. She also needs to pay closing costs when the deal is closed. Service charges are paid by the borrower to the lender for the services provided.

References

About the Author

Prasanna Raghavendra has been writing professionally since 2000. He has several published articles on websites such as eHow, 12manage, freelancejobs.org and essaywriters.net. Prasanna holds a Master of Business Administration in finance and management from the Management Development Institute, India, where he was given the most outstanding student award.