Understanding Reverse Mortgage Risks

In a reverse mortgage, the borrower does not need to prove income or credit and he is approved as long as he is over 62 years old, has a qualifying dwelling which is his or her primary residence and does not have a pending bankruptcy case.

Despite the popularity of reverse mortgages, there are some crucial points that one needs to understand before applying for one.

Seek advice
Before undertaking the reverse mortgage application, seek financial advice from a knowledgeable person. The FHA (Federal Housing Administration) now mandates that anyone contemplating applying for a reverse mortgage seek financial counseling. This ensures that the applicant is well versed in all aspects of the loan process and its ramifications. The counselors also seek to find out whether there are other alternative ways for the senior to meet the current financial needs. It is also needful to consult with a legal expert who will elaborate on the legal obligations of the reverse mortgage.

Revise your needs
When seeking a reverse mortgage it is helpful to determine whether the reason for getting the loan warrants the loan. This is because some reverse mortgages have a high interest rate and so may not be the wise financial remedy to meet such undertakings as holidays or luxurious purchases. It is good to evaluate whether other sources of income can suffice to meet the said need rather than resort to a high interest loan. Some loan stipulations also require repayment after a certain amount of time has elapsed and the senior, who at this time being older, may find themselves in a more desperate situation.

Other considerations include determining whether the home that the loan is being taken out against is the applicant’s last permanent home, that is, whether he has determined to live there until he or she dies. This is because some reverse mortgages have in-built clauses which require the loan to be repaid if the homeowner sells. Also, most reverse mortgage lenders will disqualify the applicant for a loan if the said home is not their primary residence.

The applicant must also be fully aware of other fees and costs associated with the loan. Also, even though the loan is pretty much hassle-free, the applicant must be prepared to continue meeting all the other financial obligations that accrue from living in that home namely estate taxes, utilities and general repairs and upkeep of the property in accordance with the home owners’ association regulations.

Borrowing against equity can also be a risk because once that equity is depleted, the home owner may not have any alternative sources of funds at a later date when he or she is older and needs the money the most.

Before getting a reverse mortgage learn about all the disadvantage of getting a reverse mortgage. In a traditional mortgage borrowers pay down the debt over a certain term normally 30 years. With a reverse mortgage the borrower is building up debt while they are living in their home.

Besides building up debt there also can be a significant amount up costs up front when brokering a reverse mortgage. When planning to take a small portion of the money or in planning to live in the home for a short period of time remember that the costs can push up the effective rate on your home substantially.

A final major disadvantage of reverse mortgages is that you will be leaving your family with a very small amount. This may be something you want to discuss with your family. Taking out reverse mortgages gives you less equity in your home and also leaves your family with less in their inheritance of your home. The longer you remain in your home, the more interest builds. This results in less equity in your home.

What are my current financial needs?
No matter what the age you have to assess your budget and find the best way to manage your financial needs. The best way is to go through your bills from the previous month. Be sure to include all expenses that you regularly have every month. Look over your budget to see where most of your expenses are. Then consider if you need to make adjustments to your budget.

CAN I adjust my budget?
Of course this depends on the person and their household expenses. There are several ways to cut back on your expenses for example shop at cheaper grocery stores, cut back on eating out, premium cable, etc. If you find you cannot sacrifice anything because you are so used to them, think about how much money you would need to continue. A good thing to consider is the length of time the equity in your home can cover your budget.

Am I willing to move?
There are additional options to increase your cash flow besides a reverse mortgage. The most common of options is moving. Needless to say it’s difficult considering moving out of your home that you raised your family in and maybe made improvements to but there are times when moving is the best option. Once you sell your home the money you gain from the sale could be used to rent a home or perhaps buy a smaller home. You may want to consider a townhouse or condo as well. There are times when senior citizens need to evaluate if their current home is a suitable environment. Think about if getting around your home is as easy as it used to be now that you’re older. As we all get older taking care of a larger home gets difficult. If assisted living is in your near future it may be best to sell your home.

Regardless of the final decision seniors that are considering a reverse mortgage need to assess their home situation as it presently is and decide if moving is the best option for you.

What do I plan to gain from a Reverse Mortgage and is this realistic?
This is one question you should ask yourself. Think about why you need a significant amount of cash immediately. There are many advantages and disadvantages of reverse mortgages. Regardless of why you need the money it’s extremely important to understand the interest you will be accruing. Ask yourself this question and think about what your true motives are and think about what other options might be.

Reverse mortgages, sometimes known as reverse annuity mortgages or AARP mortgages are an excellent concept in real estate financing and resolve many financial huddles that seniors face when they reach 62 years or more. Many of these problems revolve around the fact that many senior citizens retire when they are “asset-rich” but “cash-poor” This is mainly due to the fact that they have stopped earning any income from active employment and social security and pension cannot fully cater for all their needs. A reverse mortgage involves taking out a personal loan against the equity of the home.

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