Reverse Mortgage Basics

: Chris Lee Law Firm

  Filed under: Refinancing

In recent months the talk over reverse mortgages has gained momentum. With the new found refinancing craze in full swing, many lenders are also pushing reverse mortgages. But, what are they really about?

A Closer Look

One of the “perks” often described by advocates of reverse mortgages is quick cash. Basically, a reverse mortgage is a loan that is taken out of the available equity of the home. Essentially, you are borrowing against the home’s equity. Sounds like a good idea, but here are some concerns.

First, not everyone will qualify for a reverse mortgage. Only borrowers over the age of 62, who own the property used in the transaction will qualify. Further, the remaining mortgage balance must be low enough that it could be paid off with the proceeds from the reverse mortgage loan. This calculation often gets tricky and can be influenced by interest rates, home values and other factors.

Also, a reverse mortgage can create further financial problems. For example, obtaining a reverse mortgage lowers the equity in the home, thereby lowering the asset value of the home. A lower asset value can impact other loans and complicate inheritance transactions upon the passing of the homeowner. Also, the interest paid on a reverse mortgage loan is not tax deductible like a traditional mortgage loan.

Lastly, defaulting on a reverse mortgage loan can be problematic. Although the loan payments are not due until the borrower dies, sells the home or moves out of the property for 12 or more months, the responsibility is often deferred to family members or heirs of the estate. If the loan cannot be repaid, the home is generally taken back by the bank and a lien is placed on the property.

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