Reverse Mortgages: How they Work, And What You Should Know

Reverse mortgages are becoming more and more popular, as more and more seniors are working to make ends meet beyond what Social Security and their retirement income pays. But what exactly is a reverse mortgage and how does it work?

Here's a basic guide that should tell you whether or not a reverse mortgage is right for you, or a loved one.

In a normal mortgage, you pay money to the lender each month toward your home loan. A reverse mortgage is a loan from the lender that gives you extra cash as long as you live in your home. Reverse mortgages are only available to seniors aged 62 and older. If you die, sell your home or move out (for example, into a nursing home or hospice care) - you (or your surviving family) must repay the loan.

If you live alone or are strapped for cash, you may not give a reverse mortgage much thought. However there are a few things to keep in mind before you sign anything.

For example, the amount you owe on a reverse mortgage generally grows over time. There are additional fees and closing costs for a reverse mortgage that you may not be aware of. In addition, because you keep the title to your home, you are still responsible for things like maintenance, property taxes and utilities.

The amount of money you can actually borrow in a reverse mortgage depends on several factors, such as your age, the value of the home and current interest rates. The older you are, the more you can borrow. You must be 62 or older to qualify, or if you're married - you and your spouse must both be 62.

Two Types of Reverse Mortgages

There are two types of reverse mortgages, HECMs - (Home Equity Conversion Mortgage) - which make up nearly 90% of the reverse mortgages in the U.S, and Jumbo.

HECM loans have become so popular because they are federally insured and generally pay a higher amount, especially if you have an average-value home. However if your home has a high value, you'll get more benefits from the Jumbo plan over time

Added Costs and Fees

Reverse mortgages generally cost more than other kinds of home loans. Fees are generally 2% of the home's value plus a mortgage insurance premium of 2%. Then factor in the cost of things like title searches and home appraisals and the costs can add up quickly.

One thing to be extra cautious of is the idea that you can use the reverse mortgage loan to take out a deferred-annuity. High cost annuities can bar you from getting much-needed retirement savings while paying extraordinary commissions to the people that sell them. Seniors, and single senior women in particular, are often victims of this bad advice.

There are several other options available for tapping into your home's equity before considering a reverse mortgage - especially if the high fees offset the advantages of extra cash. Know the policies and do your research if you're considering a reverse mortgage. It could pay off in more ways that one!

The More You Know,

Judy O'