Many people eligible for a reverse mortgage are hesitant because it sounds complex. Hey, regular mortgages are complex enough, right? But a reverse mortgage is actually a straightforward transaction. A reverse mortgage works like this: homeowners 62 years or older are eligible to borrow money because of the equity they’ve put into their homes. These homeowners can borrow against a home even if it’s not yet completely paid for — as long as they pay off the remainder of the mortgage when they take the loan. This is an attractive option for people who need increased cash flow and want to stay in their homes. They’ve put equity into the home, now they get to take equity out.
Bankrate reminds homeowners considering a reverse mortgage that the money they borrow can be used for any purpose — a daughter’s wedding, home improvements, medical expenses, a bucket list trip down the Nile River, whatever it may be. Bankrate also reminds: “The loan balance does not have to be repaid until the borrower dies, sells the home, or permanently moves out.”
There are, however, reasons eligible homeowners might want to think twice before pursuing a reverse mortgage, according to Bankrate and AARP. Fees can go high on reverse mortgages, so — as always — it’s smart to carefully consider all the details before signing up. (For this reason, homeowners are required by law to get free third-party financial counseling before a reverse mortgage.)
The biggest risk is that homeowners need to maintain their houses, pay insurance and pay property taxes; otherwise they are in default. These are the 3 big things to watch out for, to plan for, to make sure you can do. Because the price of not doing them is simply too high. And there is another important reminder: by taking a reverse mortgage homeowners are essentially selling part of their homes back to the bank. That means that though you remain technically a homeowner, you don’t own your entire home anymore — and whenever the loan is due the house may be sold to pay it back. Note: The bank will always get paid what it’s due before any remaining money goes to your heirs.