More and more seniors want to know more about reverse mortgages. If you intend to apply for this type of loan, then it is a good idea to consider it as a last resource. It is a lot better if you use other resources first before using the equity of your home to get the needed cash.
Reverse mortgages can be very tempting for many people especially those who badly need a stable source of cash. This loan is very attractive because there are no monthly payments. However, you have to remember that everything will be paid someday in the future. And there are costs involved when taking out this kind of loan.
So before you apply, it is advisable to answer the following crucial questions first.
Do You Have a Serious Need for Money?
Have you asked yourself if your need for money is very urgent? Why do you need the extra cash? Will you use it to buy something nice or use it for a really important expense? Getting this type of mortgage is a serious financial decision. It is a long term financial obligation which could have a great impact on your future.
The decision to take a reverse home loan may be due to the prodding of a salesman. You could be enticed to convert your equity to cash so that you can buy a very expensive financial product the salesman is pushing. Many seniors are getting pushed into buying stocks, bonds, annuities, or life insurance in conjunction with their reverse mortgages. This is a bad idea. Remember that this type of mortgage, like all loans, needs to be paid off eventually. If you still have other sources, then you should consider them first before getting a reverse mortgage.
Have You Considered Your Future Plans?
A reverse home loan is simply a different type of home equity loan. Like with all home equity loans, you are "cashing out" your home's equity. However with a reverse home loan, instead of you paying the bank back every month, they pay you in the form of either a lump sum payment, monthly payments, or a combination of the two.
This sounds really great. A loan where I don't make payments...I get payments...what cold be better?
Hold on. Slow down. What makes a reverse loan enticing can also be it's biggest down fall. Remember the bank is simply "paying you" the built up equity in your home and charging you interest for it to boot. For most home owners is has taken them decades to build up this equity and reverse mortgages can eat away your equity quickly.
This loan is also expensive and the interest is compounded year after year. If you get the loan early in your retirement years, then the compounded interest will have a greater impact. Many of the programs also have a ton of fine print to increase their profit, so read all the terms carefully. Check with the American Association of Retired Persons as they have the most comprehensive analysis of all the current programs on the market and even provide counselors to help you through the reverse loan decision.
Most importantly, have you considered your long term plans? Did you want to leave the home to your heirs unencumbered by a mortgage? If you are moving a few years from now? Could you potentially get sick enough to have to relocate to an assisted living facility? If the answer is "Yes" to any of those questions, then a reverse mortgage is not a good idea.
Is Your Need for Money Absolute?
Your equity is a good guaranteed cushion. If you have a reverse home loan, this guaranteed cushion will be slowly eroded. So you need to ask if the need for money is an absolute must. You may need your equity later to pay for very important expenses like health care.
Have You Considered Other Options?
Your debt will pile up in your bank account and you need to pay it sooner or later. However, lenders will surely get their share sooner. You will lose equity piece by piece without really understanding how it happened. If you have other sources, it is best to consider them first.
Do You Have a Firm Grasp of the Process?
Not understanding the whole process is very dangerous. Because of this, you should get professional advice from a reverse mortgage counselor. Counseling is mandated by federal rules and the counselor is not connected with the lender.
Reverse mortgage is a long term loan. It is very useful if you have an urgent need for cash. But it is also important to know the intricacies of reverse mortgages before you submit your loan application.
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