Reverse Mortgages Pros and Cons

A working homeowner who needs some extra cash, perhaps for home improvement or a child’s education, can get a home equity loan, which he or she will pay down through monthly payments. An older homeowner, retired and/or on a fixed income, may also have a need for cash, but won’t necessarily qualify for or have the ability to pay down a home equity loan. In such cases, a reverse mortgage might be a good alternative.

The reverse mortgage is a loan that allows a homeowner to use the value of his or her house to pull cash from their home equity. The payment taken is tax-free, and may be in a lump sum, a line of credit that can be accessed at any time, a monthly advance, or a combination of the three. The loan generally requires the owner to be at least 62, live in the home, and not have any other outstanding debt on the home. A homeowner who hasn’t quite finished paying down the debt may qualify for an immediate cash advance from the reverse mortgage to do so.

Unlike a forward mortgage, a reverse mortgage won’t require a minimum income to borrow money; one can even qualify with no income. Seniors don’t have to worry about selling their home to obtain liquid assets. Repayment of the loan, plus interest (usually at a variable rate) and lender’s fees, is required when the home is no longer the primary residence. If the homeowner dies, it becomes the responsibility of the estate to repay the loan.

As a general rule, the older the homeowner, the higher value the house, and the less outstanding debt, the more money one can get in a reverse mortgage.

Federally-insured reverse mortgages, or Home Equity Conversion Mortgages, are backed by the U.S. Department of Housing and Urban Development. Proprietary reverse mortgages are backed by private lenders, such as Fannie Mae, and like their federally-insured counterparts, don’t limit the homeowner on how he or she may use the funds.

Single-purpose reverse mortgages are less prevalent. Offered by state and local governments and non-profit lenders, they are generally less costly in terms of fees. As the name implies, the homeowner can only use the loan money for a specific purpose, and it can be limited to homeowners with only low to moderate incomes.

The reverse mortgage is the opposite of the typical mortgage; rather than building equity and decreasing debt, the homeowner is building debt and decreasing equity. There are rare exceptions to this rule where both categories could go up, such as if the house’s value mushroomed, but in most cases the owner should be aware he or she will be leaving fewer assets to heirs.

The reverse mortgage is a type of “non-recourse” loan, meaning the amount owed can never be more than the value of the house. The only asset a lender can pursue to satisfy the loan would be the home itself, no other asset of the homeowner could be touched.

A reverse mortgage depends on one of your most valuable assets, your home. If you are considering applying for a reverse mortgage, consult with an experienced real estate lawyer from Parker|Scheer, LLP. Our lawyers help clients plan for the future, assessing the risks and rewards inherent to a reverse mortgage and other real-estate based financial and legal products.

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Contact a Massachusetts Real Estate Lawyer

For more information on reverse mortgage, or if you need a real estate lawyer in Massachusetts, please contact contact Rob D. Stewart. If you prefer, you can also telephone our offices in Boston seven days a week at toll free 866-414-0400.

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