The Benefits And Drawbacks Of A Reverse Mortgage In South Jersey

Dated: 08/26/2015

Views: 823

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If you watch TV, you’ve seen a celebrity talk of a reverse mortgage. A reverse mortgage (Home Equity Conversion Mortgage or HECM for short) is a type of home loan available to homeowners who are 62 years or older. With a reverse mortgage, senior homeowners may use their home’s equity as collateral. They receive cash payments based on their home’s equity. A reverse mortgage provides these cash payments to senior homeowners by allowing them to convert part of their home’s equity into cash. Generally, the loan does not come due until the last surviving homeowner dies, sells or moves out of the home. Until that time, the homeowner is responsible for property taxes, homeowners insurance, home maintenance and condominium fees if any apply.

If the last surviving homeowner dies, sells or moves out of the home, the estate must either pay off the reverse mortgage or sell the home to pay the remaining balance of the loan within 6 months. If there is equity remaining, the estate inherits the remainder. If the home sells for less than the remaining balance of the reverse mortgage, the estate is not liable for the difference.

How did reverse mortgages come about? Retired senior homeowners with limited incomes needed a way to be able to pay for their health care and monthly living expenses. Reverse home mortgages were created to come without restriction on how it will be used by senior homeowners, too. The cash payments based on the equity they have built in their homes allows senior homeowners to pay for health care, monthly living expenses or take a vacation if that's what they choose to do with it.

A reverse mortgage differs from a traditional mortgage. The lender pays the senior homeowner cash rather than homeowner making monthly mortgage payments. Doesn’t that sound wonderful?

A reverse mortgage can be a good way for retired senior homeowners to increase their spending power and financial security in retirement. However, with the benefits come some drawbacks with reverse mortgages.

The benefits of a reverse mortgage:

  • A senior homeowner can live in their home for as long as they want without a monthly mortgage payment and improve their immediate financial situation.

  • A senior homeowner can customize and use the reverse mortgage as a financial planning tool.

  • Their home cannot be taken from them for non-payment. This is what can happen in a traditional home equity loan. They do not make payments on the loan until they die, sell or move out of the home.

  • A senior homeowner will never owe more than the value of their home at the time the loan is paid off. This is a great advantage if the price of the home drops after a reverse mortgage is secured.

  • Whether the money from a reverse mortgage is received as fixed income or in a lump sum, it is typically tax-free.

  • The senior homeowner may use the money received from a reverse mortgage however they see fit.

  • The senior homeowner can receive the money from a reverse mortgage in one lump sum, as annuity, a credit line or as a combination of these.

  • The senior homeowner maintains homeownership of their home while they are able to live in their home.

  • When the senior homeowner secures a reverse mortgage, they can rest assured that they have a place to live for as long as want.

  • A reverse mortgage is federally insured.

  • A reverse mortgage can increase a senior homeowner’s spending power and financial security in many ways.

The drawbacks of a reverse mortgage:

  • Upfront fees on a reverse mortgage are high. (Learn more about reverse mortgage fees here: Reverse mortgage rates and fees)

  • Even though a senior homeowner makes no monthly payments on a reverse mortgage, the amount of interest owed and the amount that must eventually be paid back accumulates over time.

  • The senior homeowner may have built up a lot of equity in their home, but a reverse mortgage might allow them to use only part of it. The amount of a reverse mortgage loan is determined by the appraised value of the senior homeowner’s home, what is still owed on their home, their age and what the current interest rates are.

  • A reverse mortgage is the opposite of a traditional home loan. It is a mortgage in reverse. The senior homeowner accumulates the loan over time and pays it all back when they are no longer living in their home. This can be difficult to grasp.

Obviously, the benefits of a reverse mortgage clearly outnumber the drawbacks, but a reverse mortgage is not for everyone. Here are more three things a senior homeowner must consider before securing a reverse mortgage:

  • If they are eligible for low-income assistance, securing a reverse mortgage could disqualify them from Federal or State government assistance.

  • If they are planning to move in the near future, a reverse mortgage is not a good idea since the loan is due when "the last surviving homeowner dies, sells or moves out of the home."

  • A reverse mortgage decreases the equity in a home and affects the estate. (See Innovative Uses of a Reverse Mortgage for more information)

Studies have shown that more than 90 percent of those who have secured a reverse mortgage have less stress and the freedom to choose to live life they want to live it. Learn more about the fees associated with a reverse mortgage or instantly estimate your reverse mortgage loan amount with the Reverse Mortgage Calculator.

If you have further questions about a reverse mortgage,  contact me, Sam Lepore, at (856) 297-6827 or email [email protected] I know South Jersey real estate and will be happy to answer any questions you may have. Just ask!

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Sam Lepore

Sam Lepore is a Realtor with Keller Williams in Moorestown, NJ. Call him today at 856.297.6827 ....

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