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Reverse Mortgaging: A Basic Overview

Many seniors reach a point in their life where they are struggling financially but have few options to generate more income. This is often because of an unexpected crisis or due to a retirement at an earlier age than necessary. Regardless of the reasoning behind it, these seniors often feel that their only option is to sell their house and downsize or come out of retirement.

What they don’t know is that reverse mortgaging is tailor-made for these kinds of situations. But what is a reverse mortgage? Are they dangerous? How do they work? Reverse mortgages are often looked at as a scam; however this could not be any further from the truth. These smartly crafted plans are beneficial to a wide range of people, and while not for everyone, they can greatly improve your financial situation.

Requirements

The first and foremost requirement for entering into a reverse mortgage is being at or above the age of 62. Almost without exception, lenders will only give out reverse mortgages to those who meet this requirement. The other main requirement is that you have to have existing built up equity in your home to tap. If you do not have your house entirely paid off it is alright—you can use the proceeds from your reverse mortgage to pay off the rest of your existing mortgage.

While the previously mentioned requirements are the only requirements that are official, there are other requirements you should pass before you take out a reverse mortgage. The biggest of these is the ability to cover the upfront costs. Taking out a reverse mortgage is expensive in the short term because of fees such as origination fees and interest payments. While you will make money in the long-term, it will undoubtedly put you under immediately.

So What’s the Catch?

Reverse mortgages probably sound too good to be true—you get to stay in your house while receiving payments for the house you are living in! In fact, this idealized description IS too good to be true, but that doesn’t mean the legitimate operations of reverse mortgages are not incredibly useful and beneficial to many people.

The real catch is that you will lose ownership of your home upon death or moving into a nursing home. This means it will not be passed down to your heirs, although they will have the option of paying off the existing debts and keeping the house. If you are intent on passing down your estate to your heirs without them having to pay anything, then you may want to rethink a reverse mortgage. Don’t worry though—no outstanding debts will be passed down.

The second catch is how much you will receive for your equity. This number usually comes in shy of fifty percent of the total worth of the equity you are selling. This means if you have $100,000 in equity, you should expect to receive somewhere south of $50,000. While this is not fantastic, it is the best deal around for someone who wants to continue living in their house and needs some extra money.

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