Market Watch: Reversed Mortgages Reviewed

BY LANCE MILLER

  • A reverse mortgage can be a powerful financial tool when used properly as part of a comprehensive retirement plan. However, reverse mortgages are not without their disadvantages. Let’s review the basics.

    Reverse mortgages are available to borrowers age 62 and older who own their homes outright or have significant equity. A reverse mortgage allows borrowers to tap into their equity without being required to make principal and interest payments as long as they occupy the property as their primary residence. Borrowers may elect a lump sum distribution of a portion of the equity or may opt for monthly disbursements. The amount of equity available to borrowers depends on the value of the home as well as the age of the borrowers.

    Because reverse mortgage borrowers are not obligated to repay the loan during their lifetime, borrowers do not need to demonstrate the ability to repay the mortgage. This makes income and credit qualification much simpler than with traditional mortgages. Reverse mortgage borrowers are required to continue to pay hazard insurance premiums, HOA dues, and property taxes.

    Reverse mortgages often require significant closing costs, which are usually rolled into the loan amount. Reverse mortgages also carry an interest rate which determines the interest which accrues on any outstanding balance. Many borrowers pay little attention to the costs and the interest rate on a reverse mortgage because the payment is deferred. Borrowers should shop for the best deal on reverse mortgages just as they would with a forward mortgage. Some borrowers may find that a forward mortgage makes more sense than a reverse mortgage.

  • The amount of equity available to reverse mortgage borrowers depends on the value of the home as well as the age of the borrowers.

    When borrowers fail to occupy their property as their primary residence, or the borrowers pass away, the loan becomes due and payable. Remember, interest has been accruing on any outstanding balance since the beginning of the loan. The loan must then be paid off, possibly through selling the property or refinancing the loan.

    Borrowers interested in a reverse mortgage should consult a mortgage professional as well as their financial advisor in order to properly assess the advantages and disadvantages of this powerful and popular program.

Lance Miller is CEO of Momentum Loans.

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