What is a Reverse Mortgage?

A reverse mortgage is a loan for homeowners that are 62 years or older. With a reverse mortgage the lender makes mortgage payments to the homeowner (essentially the exact opposite of a mortgage). In order for an individual to qualify for a reverse mortgage, the mortgage must also be for the homeowner’s main residence. Reverse mortgages are most often utilized by consumers who have no offspring to leave their property to, could simply be struggling financially or are just unable to afford their current cost of living expense. With these options consumers can still live in their home and the bank will typically retain ownership of the home once they pass away.

Some Consumers Use Them to Finance Major Transactions

Older homeowners may take out a reverse mortgage for a whole host of different reasons but more often than not they typically need to finance major transactions. For some it comes down to quality of care, for others it’s the only way they can afford to live in their home as inflation becomes deeply rooted in their budget. Others needs assistance living, have to cover medical bills or simply need financial help and are on their own. In today’s economic climate, a very common reason has become that some consumers simply do not or did not have enough saved up for retirement.

Ways to Avoid a Reverse Mortgage

There are always options available before deciding to take out a reverse mortgage. The best and most reasonable option for consumers needing to finance major transactions is going to be taking out a home equity line of credit. The qualifications can be a little more difficult when it comes to home equity lines of credit but they are an open line of credit so consumers can borrow as much or as little as they need to. This makes them ideal for financing major transactions but also makes them more difficult to qualify for. Having sufficient equity can help these consumers by allowing them to borrow against the equity in their homes and still retain ownership of their home.

Pros and Cons of Reverse Mortgages

Pros: You receive monthly payments to live in your home and therefore can typically use the funds for your retirement (or lack thereof).

Cons: You’ll end up with high closing costs and still have to make insurance and property tax payments, etc. Homeowners should deeply consider a reverse mortgage if you want to leave the home to your relatives. Moreover, banks and lenders typically are the ones that profit the most off this scenario as if you pass away unexpectedly, they will retain ownership of your home for a very discounted price. Banks are usually the party winning the most when it comes to reverse mortgages.

Are They Recommended?

Reverse mortgages are typically advised against unless they are absolutely necessary. There could be some scenarios in which they are beneficial to consumers but at the end of the day, consumers are typically the ones losing out. That equity took years and years to build and to give it up a such a discounted rate is typically not a great financial decision to make. As an alternative you can possibly look to a friend or someone in the marketplace who could possibly want to buy the home off and let you live in it for the foreseeable future. There are always agreements that could be made where at least you know the home is going into good hands. Otherwise, reverse mortgages should be used as a last resort and really aren’t a good option for the long term minded individual.