The follow is a guest post by Tanesha Morgan a writer for Personal Finance Analyst. Personal Finance Analyst is an online community of bloggers dedicated to taking the mystery out of money and helping you to live a happier, more successful life with the money you have.
Lately, I have been seeing many advertisements about reverse mortgages.Â From what I gather, it sounds like a pretty good deal.Â As I understand it, once you reach the age of 62, you can tap into the equity of your home.Â You can receive the equity as either monthly payments or as a lump sum.Â And you never have to pay it back... as long as you do not sell the house.Â However, upon death, the home is sold by the lender.Â The mortgage company recoups its money out of the deal and the remainder goes to your heirs.
It seems like a good deal.Â Many people are equity rich and cash poor.Â And equity will not pay medical bills or afford you trips around the world.Â However, a reverse mortgage does just the opposite... you'll be cash rich and equity poor.
The down fall though, you will be tapping into your children's potential inheritance.Â But I don't think that is a bad thing.Â I feel the same way about this as I do about whole life insurance.Â When you are 60, 70, 80... your children ought to be self sufficient.Â They should not be depending on your money to sustain them. I am sure adult children would be much happier to see their elderly parents enjoying the benefits of their years of hard work and sacrifice.Â And besides, you'll have enough extra riches to invite them to Cape Town with you.
Anyhow, all I know about reverse mortgages is what I have seen on television.Â So I decided I would learn a bit more about it for myself... the specs, the good and the bad.
What is it?Â A reverse mortgage is a home loan that allows the owner to convert their home equity into cash.Â However, this is a special loan that is only made available to those 62 or older who own their home, or have a relatively low mortgage balance.Â These loans can only be taken out on the home in which the borrower occupies.Â There are different ways to receive loan payments... but in general, the borrower can get a lump sum or monthly payments.
Reverse mortgages allows your home to pay you back.Â After taking 20 or more years to pay off a home, it is nice to have some real hard cash to show for your investment.Â Reverse mortgages takes equity off paper and puts it into your pocket.
And as long as the borrower remains in the home, the loan does not have to be repaid.Â Upon the death of the borrower, the home is sold and proceeds are used to repay the lender.Â Remaining proceeds, if any, are distributed to the decedent's heirs.
If the loan is originated though a public lender, such as HUD, there may be a limitation on the use of the funds.Â However, if you use a private lender, no such limitations exist.Â You can use the money to supplement your retirement income, buy an RV, spoil the grandkids, pay medical bills... or anything else you come up with.
For tax purposes, the cash you receive under a reverse mortgage is not considered income.Â This is great, especially for those seniors that are bordering on a higher tax bracket.
There is a limit on the amount of money you can borrow under a reverse mortgage.Â So even if you have a million dollars worth of home equity, you can't borrow more than the legally set ceiling.Â The average national limit now is about $400,000.
Many people are deterred by the associated loan costs.Â Private lenders typically charge application fees, servicing fees, appraisal fees, origination fess, high interest rates, closing costs... and fees, fees and more fees. However the Housing and Economic Recovery Act of 2008 has placed some restrictions on these fees.
One huge disadvantage to reverse mortgages is that you are increasing your debt and decreasing your home equity.Â If the loan becomes due during a period of declining home values, you may owe more on the loan than what your home is worth.Â But this should be of little concern, because in most economies, property values generally increase over time.
Overall, I like the whole concept of reverse mortgages.Â The majority of most people's net worth is comprised of their home equity.Â While home equity is a real asset, it is not tangible.Â Transferring equity into a liquid asset can ease many financial burdens and can also improve a person's lifestyle.
Lazy Man's Take: - I'm not sure that anything with "fees, fees, and more fees" is a good deal. Another good option is to downsize into something with less maintenance. Of course downsizing has it's own set of fees: moving, selling a home, buying or renting a new one, etc.
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