Reverse Mortgage Pros and Cons

[Aug 14, 2009.]

 

Reverse mortgages have been around for about 20 years, but are getting more attention than ever. That's because many older Americans have taken huge hits to their retirement funds and are searching for additional sources of income. Reverse mortgages have been the subject of hot debate recently as some people have questioned whether they do more harm than good.  Proponents argue that these loans are a useful tool for seniors who are struggling to make ends meet. 

Reverse Mortgages Convert Home Equity into Cash

Among the pros of this type of loan is that people 62 and up can use reverse mortgages to cash out some of the equity they've built up over the years. This can allow homeowners who are having a hard time paying bills, juggling a lot of debt, or struggling with large medical bills to find an additional source of income. In fact, borrowers can use the money for anything, which is part of the appeal of this type of mortgage.  The Home Equity Conversion Mortgage (HECM) is the most popular reverse mortgage program in the U.S., but there are other programs available.

No Monthly Payments on a Mortgage

Another huge benefit to getting a reverse loan is having no monthly payments on a mortgage. Homeowners don't have to pay back the loan until they move or die. Also, a loan applicant won't need a credit check to qualify. They will, however, have to show that the home is their primary residence.

Dangers of Reverse Mortgages

Despite the positives, some people feel that tapping home equity with a reverse mortgage is too risky for many folks. Among the dangers of reverse mortgages that are commonly cited are:

—People who tap their home equity may diminish the amount of inheritance they can leave to their hers

—Some mortgage professionals may try to talk seniors into purchasing pricey annuities or other financial products when they apply for reverse home loans

—People who have long lifespans may outlive the money they receive from reverse mortgages

—Homeowners who get reverse mortgages too soon may end up with less money than if they had waited a few more years to apply for a loan

—Misleading marketing claims by some reverse mortgage lenders

As with any financial product, a homeowner needs to get all the facts before committing to a mortgage.  Check out this useful infographic that helps debunk common reverse mortgage myths and separate fact from fiction.  Counseling is required before proceeding with an application, so seniors can get mortgage advice  to help decide whether getting a loan is a wise decision.

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.