Many people have asked me if I think reverse mortgages are a good idea. My usual first question back to them is, "When you purchased your home what were your intentions for the home?" I ask this question because I realize most do not have a good grasp on what a reverse mortgage is and what it does to the home owner.
A reverse mortgage is a type of home equity loan.
In essence, the homeowner is selling the equity he or she has built in the home and in exchange the lender now has your investment.
Doesn't make sense yet? Okay, let's look at this numerically:
Let's say you have no mortgage on your home and the home is worth $150,000 and you take out a reverse mortgage. In a traditional mortgage the lender would give you the amount approved ($100,000 for example) and in the following months you would pay back the $100,000 in installments over an agreed upon time period.
In a reverse mortgage using those same numbers, on a monthly basis the lender would send you an installment payment and you as the homeowner are not required to pay anything back...yet. Once the lender payments have reached $100,000, they no longer send you a payment.
So how does the lender get their money back?
Once the homeowner passes away or they sell the house the lender gets its money back. So in this example when the homeowner passes away or sells the home, the lender receives a check for $100,000 and the homeowner (or homeowner’s estate if deceased) receives a check for $50,000 less any fees and expenses.
The "intent" of a reverse mortgage is to help seniors with medical or other expenses they may unable to pay. As we get into our senior years medical expenses become the primary expense many of us have. When you couple the rising costs of medical expenses and the fact that most are on Medicaid, there can be a need for more funds.
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The Truth About Reverse Mortgages
By Winfred Burns II