Reverse Mortgages: Understanding the Pros and Cons


Ananya Chakravorty
Management Student
NSB, NIILM School of Business
New Delhi

Older citizens may want to consider a reverse mortgage, which borrows against the equity in a home to give you cash in hand month after month. For a vast majority of older Americans who own their homes and get a reverse mortgage, this would mean a steady source of income for the remainder of their lives. The proceeds from sale of the real estate after the passing of the mortgage holder is used then to pay the lender, the remainder still owed on the mortgage.

A reverse mortgage may be a good solution that will provide you with reliable income and eliminate the stress of paying a mortgage on a fixed income. Reverse mortgages are not a good solution for everyone wanting to overhaul their mortgages to make them more cost-friendly. Take a closer look at the pros and cons of reverse mortgages to help you understand the benefits and risks.

The Dealing Parties: Reverse mortgage loan involves two parties, the borrower - the senior citizen and the lender - any bank or housing finance institution.

What are the features of this loan?

The draft guidelines of reverse mortgage in India prepared by the Reserve Bank of India, have the following features:

Any house owner over 60 years of age is eligible for a reverse mortgage.

The maximum loan is up to 60 per cent of the value of the residential property.

The maximum period of property mortgage is 15 years with a bank or HFC (housing finance company).

The borrower can opt for a monthly, quarterly, annual or lump sum payments at any point, as per his discretion.

The revaluation of the property has to be undertaken by the bank or HFC once every 5 years.

The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability.

Reverse mortgage rates can be fixed or floating and hence will vary according to market conditions depending on the interest rate regime chosen by the borrower.

The pros of Reverse Mortgage

* You have the flexibility of choosing whether to take payment from the equity in your home in a single lump payment, or as month payments and even a line of credit you access as needed. You can also combine any of these options which may be especially helpful to you when unexpected household repairs, or illness and injuries occur and you need a large amount of money quickly in the short term.

* The money is exempt from taxes and a guaranteed income that continues until your death.

* You can remain in your home which is very important to many of us, as we get older.

* You can never owe more than your home's value, regardless of the balance still owed on a mortgage at the time of your passing.

* Home owners are not required to own their homes outright in order to qualify for a reverse mortgage, which helps if you are still paying on a mortgage.

* At the time of your passing if your home's value is more than the remaining balance still owed on the reverse mortgage that difference will be paid to the heirs of your estate.

* If you decide to repay the money you have received with a reverse mortgage, you can do this without having to sell your home.

* Medicare and Social Security incomes are not affected by income from reverse mortgages. You will not lose your benefits by obtaining a reverse mortgage.

* The title of your home remains in your name.

* There are no monthly payments for you to make such as you would need to by taking out a home equity line of credit loan.

* In a reverse of the typical considerations for determining a loan like your credit score, income, and savings: your health, age, and your home's net value and the equity it has built up are how reverse mortgages amounts are determined.

* You have a three day 'buyer's remorse' clause of protection in case you decide against a reverse mortgage within three days of its closing.

The Cons Of Reverse Mortgages

* Fees, interest rates, insurance, and closing costs can culminate together into quite    an expensive mortgage that you may not want to carry at this stage in your life.

* You must be at least 62 years of age in order to qualify for a reverse mortgage.

* The heirs to your estate may receive less because there was a greater balance owed on the mortgage than the proceeds from the sale of your real estate netted.

* Failing to keep up with your property taxes, home insurance, and repair costs could lead to you having to pay back your reverse mortgage early.

* If you are the holder of a mortgage at the time of acquiring a reverse mortgage, the amount you still owe on your mortgage is added into the amount of your reverse mortgage.

* If you sell your home or move to another residence, you will have to pay your reverse mortgage back. A reverse mortgage loan is paid prior to heirs receiving money from your estate upon your passing as well.

* There are caps in place that limit how much you money you can borrow with a reverse mortgage.

* Reverse mortgages are typically more expensive than other types of mortgages.

* You must meet with a mortgage counsellor prior to getting approval on a reverse mortgage loan.

* Refinancing a reverse mortgage after the three day 'buyer's remorse' period has expired can be expensive and difficult to accomplish.

* Now that you know the advantages and disadvantages associated with reverse mortgages, you may now more easily be able to decide if a reverse mortgage is the best solution for you.

Allan Young is a freelance writer who offers suggestions about how to get a reverse mortgage.




Ananya Chakravorty
Management Student
NSB, NIILM School of Business
New Delhi

Source: E-mail August 27, 2010




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