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Reverse Mortgages - What Are They?

The great American Dream is to own a home. After all, it is a great nest egg investment. When you hit your retirement years, however, how do you turn the equity in the home into money you can use? Many suggest using a reverse mortgage.

Most people are familiar with a forward mortgage. You borrow money from a lender to pay for a home. You then pay back the loan on a schedule over a number of years. The reverse mortgage is similar to this, but the money is going the other way.

The reverse mortgage is touted as a revolutionary new financial product. This is not entirely or even remotely true. This financial product has been around since the 1960s.

The reverse mortgage is legally restricted to a certain class of homeowners. In fact, you have to be at least 62 years old before you can even think about applying for one. Assuming you meet this requirement, everything flips.

After years of making monthly payments to the lender on your traditional mortgage, you are going to love the reverse mortgage. Why? The lender will be making payments to you!

So, what is the deal with the payments? Well, it depends on the lender. In some situations, you can receive a lump sum payment for your equity. In others, you can get monthly payments from the lender.

The star issue paraded in the marketing for reverse mortgages is the mortgage pay back. Simply put, there is none. The lender recovers the money they have paid you when the house is subsequently sold.

So, are there any negatives to this equity converting financial product? Oh, yes there are. Remember, marketing efforts are all about emphasizing the positive while ignoring the negatives.

If you have heirs you wish to take care of, the reverse mortgage can be a nightmare. Remember, you are selling your equity in the home. When you pass away, this often results in little being left for your heirs.

A huge problem with the reverse mortgage is the expense. They are incredibly expensive, often costing tens of thousands of dollars to institute. The FHA has even started overseeing them to protect consumers.

At the end of the day, most financial professionals view reverse mortgages as a less than stellar option for seniors to access the equity in their homes. If you are faced with this problem, make sure to explore all options available to you with a financial consultant.