A More Profitable Alternative

You’ve probably heard the term "reverse mortgage," which refers to a loan that allows homeowners aged 62 and older to tap the equity in their home, without repaying it. This has become an increasingly popular way for retirees to generate extra income for living expenses and paying off debt.

However, high fees and aggressive sales tactics prompted the Senate Special Committee on Aging to recently issue an investor alert. The intention behind the warning is not to discourage reverse mortgages, but rather to encourage homeowners to make sure it's the right loan product for them.

The biggest downside to such an agreement is that the up-front costs for application, legal fees, document recording, and loan origination fees can sometimes top 10% of the loan's value. For this reason, the federal government requires meeting with a financial counselor prior to applying for a reverse mortgage, helping ensure that it's the best loan product for your situation.

In addition to a financial advisor, you are strongly encouraged to consult with a local real estate agent. Simply put, you might generate more income by selling your home and moving to a less expensive one, directly pocketing the equity you've worked so hard to build over the years. An agent can compare your home's value to other attractive properties on the market, and guide you to a profitable conclusion!

Putting it in Reverse!

Reverse mortgages have existed for nearly twenty years now, but still aren't well understood. Their complexity makes it difficult to separate fact from fiction, and not every person over 61 years old will find a reverse mortgage to be the best choice.

How does it work? It's still a loan, but is not paid back until the last owner/co-owner dies, or the home is sold or left unoccupied for one year. You may receive an equity line of credit, borrowing money as needed, or receive monthly checks for the rest of your life, like an annuity.

The loan amount is based on your age and your home's value, among other factors. Lenders don't loan the full value of your home, and there are fees. While a reverse mortgage provides a low-risk option that allows seniors to remain in their home for the rest of their lives, other investments should be depleted before giving it consideration. Your home's equity should be tapped as a last resource.

When the loan becomes due for any of the reasons stated above, the home is sold and you (or your heirs) would receive any money left over. If the house sells for less than the loan amount, the lender eats the loss. Again, this is a great option for many, but not all, qualified borrowers. Give it thorough investigation.