There is no right or wrong answer to this question. Many people regard reverse mortgages as a universally harmful product, but this simply is not true. There are scenarios in which taking out this type of loan is in the homeowner’s best interest. Even in these scenarios, it is important that the homeowner takes the time to educate him- or herself about the real estate laws surrounding such a choice.
Reverse mortgages are often marketed to older homeowners. If you or your parents are receiving advertisements for reverse mortgages, do not make any rushed moves or uninformed purchases. Consider the following about reverse mortgages:
A Reverse Mortgage Puts Money in Your Pocket
A reverse mortgage works like this: The homeowner uses his or her equity in the home as collateral for a loan. The homeowner keeps the title to the home, but while the loan is active, he or she owns less of the home. The homeowner can choose to receive this money in monthly installments, as credit, or as one lump sum.
This Money has a Price
Like any loan, the money you receive through a reverse mortgage is not yours for good, it is only yours for now. The money will have to be repaid to the bank when you stop living in the home or if you stop meeting the loan’s requirements. Reverse mortgages can have high upfront fees, which can be 10% or more of the loan amount. Their interest rates also compound over time, which can lead to a very large bill for the homeowner once repayment time comes.
Repaying the Reverse Mortgage Loan
The money loaned to a homeowner through a reverse mortgage is due when one of the following occurs:
- The homeowner dies;
- The homeowner fails to meet the loan’s requirements;
- The homeowner moves out of the home for a period of 12 months or longer; or
- The homeowner sells the home.
Reverse mortgages are non-recourse loans. A lender can only recover its money by selling the home. A homeowner’s heirs do not “inherit” a reverse mortgage loan when they inherit a home – they must repay the loan immediately if they can afford
it or if they cannot, they must sell the home to satisfy the homeowner’s debt. If the home sells for less than the homeowner owed on his or her reverse mortgage, the lender cannot take legal action against the homeowner’s heirs to recover this money.
Work with an Experienced Real Estate Lawyer
Knowing how to make the right financial moves involving your home is not always easy. To get a better understanding of different mortgage products, your rights as a borrower and a homeowner, and how to avoid making a costly mistake with products like reverse mortgages, schedule a legal consultation with an experienced real estate lawyer at Moen Sheehan Meyer, Ltd. Do not sign anything in the real estate realm without first speaking with a lawyer.