Tips, explanations, and warnings you should know before you or a loved one applies for a reverse mortgage.
Recently, senior citizens have been given the opportunity to apply for a reverse mortgage. On the surface, this sounds like an excellent plan. Seniors are given money every month while occupying a home. This gives them the opportunity to be homeowners during their golden years. But are reverse mortgages really wise investments? Or are they too good to be true?
HOW A REVERSE MORTGAGE WORKS
In a traditional mortgage agreement, the homeowner pays a certain amount each month until the mortgage is paid off. In a reverse mortgage, the lender pays the homeowner a certain amount of money each month. The homeowner will not have to pay this money back during his or her lifetime. Reverse mortgage loans are available only to senior citizens who do not currently owe anything on their homes. In some cases, reverse mortgage funds may be used to pay off the balance on an existing mortgage.
WHERE DOES THE MONEY COME FROM?
The money paid a senior citizen during the course of a reverse mortgage is considered a loan. The senior citizen is never expected to pay the loan back, unless he or she moves out of the home prior to death.
WHAT HAPPENS AFTER THE HOMEOWNER DIES?
After the homeowner dies, the house must be sold in order to pay back the loan. If the proceeds from the sale are larger than the amount paid out during the course of the reverse mortgage, the heirs keep the difference. In other words, the heirs may not keep the house itself, but may keep profits from the sale of the house.
THINGS TO CONSIDER
Before entering into a reverse mortgage, the senior citizen must consider several factors. First, a reverse mortgage is a commitment to live in the house for the rest of one’s life. If the senior citizen must move to an assisted living or other care facility due to age-related illness, the loan may immediately become due. Also, if the house is intended as a family heirloom, one cannot get a reverse mortgage; the house is required to be sold after death.
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