Reverse Mortgage Loans for Seniors
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Reverse Mortgages

Home Equity Loans for Seniors Can Lead to Debt

If you're a homeowner age 62 or older, you may have heard that you can benefit from a reverse mortgage.

However, there is a lot to know about reverse mortgages and how taking on debt in your retirement years can affect your future and your family.

Reverse mortgages are a line of tax-free credit extended to homeowners to finance a home improvement, pay off your current mortgage, supplement your retirement income, or pay for healthcare expenses. Unlike a traditional mortgage, the money received in a reverse mortgage does not have to be repaid as long as the homeowner lives in the home.

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There are three types of reverse mortgages:

  • Single-purpose reverse mortgages, offered by some state and local government agencies and nonprofit organizations
  • Federally-insured reverse mortgages, known as Home Equity Conversion Mortgages (HECMs) and backed by the U. S. Department of Housing and Urban Development (HUD)
  • Proprietary reverse mortgages, private loans that are backed by the companies that develop them

How Reverse Mortgages Work

Reverse mortgages can be paid out in a lump sum, as a monthly payment, as a line of credit to draw upon, or as a combination of the three.

With these features, reverse mortgages seem like a great option for retired or senior homeowners looking to extend their income. However, as with most types of loans, there are some pitfalls to be aware of.

In a traditional mortgage, the homeowner is gaining equity by continually paying down their debt. A reverse mortgage is, logically, the opposite. As long as the homeowner continues to draw from the reverse mortgage, debt increases and equity decreases. And because reverse mortgages have the "benefit" of not being paid back until the homeowner sells, moves or dies, the loan continues to collect interest.

Another potential drawback for homeowners seeking a reverse mortgage is that they can only be loaned out for homes that are owned outright. If the homeowner carries a mortgage, the reverse mortgage loan must first be used to pay off the original mortgage. If the original mortgage is greater than the reverse mortgage amount, the reverse mortgage may be denied.

Repaying a Reverse Mortgage Loan

Reverse mortgages, whether issued by the federal government, local agency or corporate bank, come with the promise of not being repaid until the borrower no longer lives in the home. In other words, when:

  • The homeowner sells the home: if you decide to downsize to a smaller home or retirement community, a portion of your home equity will have to go to repay the reverse mortgage loan.
  • The home is no longer the homeowner's primary residence: if you become ill and must move to an extended care facility but keep your home, you'll have to start repaying the reverse mortgage loan—in addition to medical and other bills.
  • The homeowner dies: if you pass away before repaying your loan, your family will be stuck with the bill, and with less equity to cover expenses.

For more information on managing debts in retirement, connect with a local bankruptcy attorney today:

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