Have you noticed the increasing number of advertisements expounding the merits of reverse mortgages? Smiling celebrities advise seniors that their lives could improve immensely if they simply harvested the available equity in their homes. Take an expensive trip, remodel your home, or just have fun with the extra money. They can make it sound pretty appealing.
As the name implies, a reverse mortgage is the opposite of a traditional mortgage. With a traditional mortgage, you borrow a sum of money to purchase a home, then pay off the debt over time. With a reverse mortgage, you receive loan proceeds – as a lump-sum payout, an annuity, a line of credit, or a combination of all three – but make no payments as long as you reside in the property. The loan, with accrued interest, comes due when you move out or pass away. To qualify for a reverse mortgage, you need to be 62 or older, own your residence, and generally have significant equity in your home.
As the promotion and pool of potential customers for reverse mortgages continues to grow, so do reports of abuse regarding aggressive and even predatory sales practices. A few things to analyze if you’re thinking about a reverse mortgage include the following:
- Ask yourself if a reverse mortgage makes sense. Evaluate alternatives. Conventional solutions such as a home-equity loan might be a better answer.
- Reverse mortgages can be expensive. Upfront fees are significant. If you stay in your home just a few years, the effective interest rate can be very high.
- Beware of bundled sales pitches. Commission driven salesmen can push life insurance or various annuity products along with a reverse mortgage. You could end up with products you don’t need.