Reverse mortgages are certainly receiving a lot of attention in the media presently, but the actual facts behind reverse mortgages are often misunderstood.  A reverse mortgage can be a great idea for some seniors in certain situations, but it is important to fully understand all the details behind reverse mortgages before making a decision.

A reverse mortgage is a loan designed with senior citizens in mind.  These people, in general, either have their homes paid off or at least have managed to build up a substantial amount of equity in the home.  A reverse mortgage taps into that equity and provides a lump sum, monthly income, or a credit line for seniors.  There are no monthly payments with reverse mortgages because the money is being drawn from the equity of the home. In this sense, there is no debt being created per se, but rather a reduction of available equity in the home.

For seniors who are in need of some additional cash a reverse mortgage can be a good idea.  The old saying “house rich, cash poor” means that a person may have spent years paying down a mortgage but failed to save money otherwise.  These people may find themselves living in a paid off home with no money in the bank.  Instead of taking out a traditional equity loan, which would require monthly payments seniors could instead use a reverse mortgage to generate an income.  This allows for the equity to work for the person, and for the person to not have to worry about scraping together a monthly payment.

A common misconception with reverse mortgages is that the borrower is essentially signing their home over to the lender until the borrower dies, and then the lender takes possession of the home.  The fact of the matter is that a reverse mortgage does not terminate solely with the death of the borrower, but can also end when a borrower moves from the home or otherwise makes the home a secondary residence instead of a primary one.  The idea that the lender will take the home after the loan is terminated is also false.  The lender will indeed need to be paid for the money utilized by the reverse mortgage, but this can be done by paying the money back or selling the home and clearing the reverse mortgage with a portion of the profits.  For this reason, though, seniors need to realize that by utilizing a reverse mortgage they are effectively reducing the amount of money their families will inherit.  This idea, however, can easily be applied to any other sort of loan since all debt must be settled upon death before heirs can claim their inheritance. 

Reverse mortgage can indeed be a smart move for some situations, but not for all.  The younger the borrower the less money they will be able to borrower using a reverse mortgage, so younger people should probably seek out alternate means by which to borrow money.  Reverse mortgages also differ from one lender to another, so it is incredibly important to fully understand every piece of information being presented when considering a reverse mortgage.  Like any other financial product, there are plenty of unscrupulous lenders out there who are looking to swindle folks out of their money.  Seniors are always a prime target for these sorts of scams since they can sometimes be easily confused or sometimes desperate for money.  Seniors should never, ever sign any financial documentation without having a complete knowledge of what they are getting themselves into.

Reverse mortgages don’t have to be mysterious; some companies actually charge money to explain these sorts of mortgages to seniors and there is no reason why that should be needed.  Reputable financial institutions should be willing to thoroughly explain every detail of reverse mortgages to potential borrowers, as many times as needed until the entire process is crystal clear.  Reverse mortgages can be a great idea for seniors who are looking to have some extra income or even a big lump sum of money without having to find a way to make monthly payments on a loan.  Seniors, however, must take great care to ensure they fully understand the terms of the reverse mortgage loan before signing any paperwork.

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