Cautions About Taking a Reverse Mortgage

Cautions About Taking a Reverse Mortgage
  • Opening Intro -

    When it comes to reverse mortgages, reading the contract's fine print is important.

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It may be so important that people that are aged 62 and older, and qualify for such loans may be placing themselves in financial jeopardy without fully understanding what they are doing. Reverse mortgages are not for everyone and for those homeowners seeking one, the following should be kept in mind.

Definition

A reverse mortgage is loan available to mature Americans that allows them to tap the equity in their homes to supplement their living expenses. Whereas Social Security and pensions may provide some financial relief, a reverse mortgage can free up equity in a home to handle additional cost of living expenditures.

Reverse mortgages typically harness a portion of the equity in a home. There are certain lending guidelines that must be followed including that the home must be the primary residence for the homeowner.

Equity to Cash

Built up equity can be converted to cash, funds that senior Americans can use. Loans are not repaid until the owner moves out of the home or dies. In the latter example, the home is sold to settle the estate.

Reverse mortgages are considered as “non-recourse” loans. What this means is that homeowners (or their heirs) do not owe more on the home than its value.

Home Titling

Problems with reverse loans can crop up. For instance, if the home has only one name on the title and that spouse dies, then the surviving spouse must pay off the loan immediately to remain in the home.

Of course, having both names on the title will prevent a problem. The challenge here is for seniors to never assume that both spouses are listed.

Your Responsibilities

Older Americans are sometimes surprised to learn that their reverse mortgages come with steep fees. Homeowners are also responsible for property taxes, maintenance and insurance.

Foreclosures on homes under a reverse mortgage can happen if any of the requirements mentioned earlier are not satisfied. If the loan becomes “due and payable” then the borrower will be given the opportunity to correct the default, pay off the debt, sell the property for at least 95 percent of its appraised value or deed the property to the lender. If the property is sold, then the proceeds must be applied to the mortgage balance according to Nolo.

Considerations

With so many possible problems with reverse mortgages, older Americans may be loathe to pursue this option. However, when crafted carefully, a reverse mortgage can provide the funds seniors live to live out their remaining days in comfort.

One big advantage of a reverse mortgage over most other loan options is that these loans do not incur a deficiency judgment if a loan defaults. By law, lenders may not collect the difference between what the home is valued and its selling price, an expense wholly borne by the lender. Have your attorney review all loan paperwork before agreeing to a reverse mortgage.

See AlsoWhat Are My Mortgage Options?

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Categories: Home Financing

About Author

Matthew C. Keegan

Matt Keegan is a freelance writer and editor as well as publisher of "Auto Trends Magazine", an online publication. Matt covers campus, consumer, business and financial topics on various websites and weblogs, and has been published in the "Houston Chronicle", "Sam's Club Magazine" and "Wisconsin Golfer".