Reverse Mortgages - What Are They?

The great American Dream is to own a home. After all, it is a great nest egg investment. When you hit your retirement years, however, how do you turn the equity in the home into money you can use? Many suggest using a reverse mortgage.

The traditional mortgage can be described simply. The lender issues you a bulk sum of money to buy a property. In exchange, you agree to pay back the sum plus interest over a lengthy period of 15 or 30 years.

The reverse mortgage is touted as a revolutionary new financial product. This is not entirely or even remotely true. This financial product has been around since the 1960s.

The reverse mortgage is legally restricted to a certain class of homeowners. In fact, you have to be at least 62 years old before you can even think about applying for one. Assuming you meet this requirement, everything flips.

The reverse mortgage works the opposite of a traditional mortage, but it can be hard to get your head around the concept. Essentially, the lender buys the equity in the home from you by making payments to you.

So, what is the deal with the payments? Well, it depends on the lender. In some situations, you can receive a lump sum payment for your equity. In others, you can get monthly payments from the lender.

The star issue paraded in the marketing for reverse mortgages is the mortgage pay back. Simply put, there is none. The lender recovers the money they have paid you when the house is subsequently sold.

Are their any downsides to the reverse mortgage? If you listing to the advertising, you would think not. Look past the marketing pieces and the reverse mortgage can quickly become a horror show.

If you have heirs you wish to take care of, the reverse mortgage can be a nightmare. Remember, you are selling your equity in the home. When you pass away, this often results in little being left for your heirs.

A huge problem with the reverse mortgage is the expense. They are incredibly expensive, often costing tens of thousands of dollars to institute. The FHA has even started overseeing them to protect consumers.

Sooner or later, home owners are going to have access the equity in their homes. Despite the big marketing effort, these loans are not a great option for seniors. Better ones exist, so speak with your planner to learn more.

Barry Waxler is a financial planner who writes about financial planning for UFCAmerica.com.

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Reverse Mortgages - What Are They?
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