What is the one thing you read over and over? Buy a home! The advice makes sense in this case as a home is a good long term investment. The question, however, is how do you get the money out when you need it? The traditional mortgage can be described simply. The lender issues you a bulk sum of money to buy a property. In exchange, you agree to pay back the sum plus interest over a lengthy period of 15 or 30 years. 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 one of the rare financial tools that allows for age bias. In fact, there is a mandatory age limit and it is legal. Simply put, you must be 62 year of age or older to apply for a mortgage.
The reverse mortgage works the opposite of a traditional mortage, but it can be hard to get your head around the concept. Essentially, the lender buys the equity in the home from you by 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 good news is you need not pay back the money the lender is paying you. Instead, the lender will recover the money when the home is eventually sold. The bad news is you are limited to selling only fifty percent of the equity you have in your home. 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. The first problem with the reverse mortgage is your heirs.
If you hope to leave them with something, you need to realize the reverse mortgage lender is going to take a large chunk of the equity in your home when you sell it or pass on. The second problem is the loan is expensive. You can spend tens of thousands of dollars getting into the loan.
The interest rate on the amount you owe is also higher than forward mortgages, often two to three points higher. Sooner or later, home owners are going to have access the equity in their homes. Despite the big marketing effort, these loans are not a great option for seniors. Better ones exist, so speak with your planner to learn more.
Barry Waxler is a financial advisor with UFCAmerica.com.