A reverse mortgage is a type of home loan that is given to you as a portion of the equity in your home. These types of mortgages can also be called Home Equity Conversion Mortgages and are different than a standard home equity line of credit. A typical home equity line of credit requires that the borrower make monthly payments on principal and interest, but a reverse mortgage pays the borrower. However, the principal and interest amount taken out must be paid when the home is sold, or no longer used as the principal residence.
Reverse mortgages can be valuable tools to supplement income in some circumstances. However, there are a number of drawbacks with reverse mortgages.
First, since reverse mortgages are available to anyone based on the equity in the home and not the borrower’s credit worthiness or income, lenders typically will charge for higher fees to originate the loans because they are subjected to higher risks.
Second, all of the principal and interest must be paid back when the home is no longer used as the principal residence. This means not only when the property is sold, but also when the borrower dies. Often the balance of the mortgage is much higher than the fair market value of the house and when that is the case, the borrower’s heirs who would have inherited the property, will have only a few options. The heirs may take out a conventional mortgage to pay off the reverse mortgage or the heirs may sell the property, and if the reverse mortgage exceeds the value of the property, the heirs will owe the lender 95% of the fair market value. The heirs can also allow the mortgage company to foreclose on the property and simply walk away.
Reverse mortgages sound like a convenient way to tap into your home’s equity to generate an income stream, particularly if you are in retirement on a fixed income. However, these reverse mortgages come with significant risks and often unintended consequences for your heirs.
As always, carefully consider all of your options before signing any loan documents.
Elder Law involves planning for the complex health care, long-term care, and other issues facing elderly and disabled individuals and their families. Meeting with a qualified elder law attorney may enlighten you to valuable resources available to address your elder law concerns and needs.
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