How would you feel about a mortgage where you lose equity in your home every month? This is the basic premise behind a reverse mortgage.
What is a reverse mortgage?
According to HUD, "a reverse mortgage is a special type of home loan that lets a homeowner convert a portion of the equity in his or her home into cash.
"The equity built up over years of home mortgage payments can be paid to you. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence."
(For more info, visit http://www.hud.gov/ offices/hsg/sfh/hecm/rmtopten.cfm)
These mortgages are touted to seniors, age 62 and above, who want to pull money out of their paid up or almost paid up homes to increase their monthly income or pull out a lump sum of cash.
One Web site that I investigated proclaimed, "Reverse Mortgages Offer Senior Homeowners a Way to Turn Home Equity into Tax Free Cash!"
Sound too good to be true?
It is true, however, as the old saying goes, the devil is in the details and the details need careful examination.
Reverse mortgages can be a savior for some and a costly mistake for others.
In a conversation with Kevin Dick, a local financial adviser, he said that they would be beneficial in rare instances.
If you have had a reverse mortgage for a period of time and decide to move, you may have less equity in your home.
That means, when you sell your home to buy another residence, you may have less buying power toward your new home.
The reverse mortgage would have to be paid off when changing primary residences.
In checking with some reverse mortgage lenders, their fees to set up the mortgage could be almost $20,000. This seems excessive. A reverse mortgage of $154,000 could result in fees that amount to over 13 percent of the loan.
There have been many scams regarding this so-called "cash poor, house rich" option. HUD now requires counseling prior to entering an agreement regarding these mortgages.
Every situation is different; therefore, one should consult an attorney, financial planner, and CPA prior to entering into any financial venture such as a reverse mortgage.