Taking Out a Reverse Mortgage
In difficult economic times, home-owning entrepreneurs of all ages may be able to place first or second mortgages on their homes, refinance existing mortgages to take advantage of equity, or establish lines of credit secured by their residences.
The availability of these options to individual borrowers depends on many factors, such as credit history, equity, interest rates and lending standards, which are now tightening. One consequence of using these financing vehicles to access capital is that you'll be taking on additional debt with a new or larger monthly payment.
However, qualifying senior citizen entrepreneurs that own a home have an alternative loan option: the reverse mortgage, which is the opposite of a standard or conventional mortgage. Generally, the purpose of a reverse mortgage is to help homeowners over the age of 62 continue living in their homes while supplementing their monthly incomes. The best candidates for reverse mortgages are homeowners who have large equities in their homes, but who are cash-poor.
Reverse mortgages, like conventional mortgages, are loans secured by the borrowers' residential real property. The loan proceeds may be taken out as a line of credit to be drawn down as needed, a fixed sum to be paid monthly to the borrower or a combination of these plans. However, with the reverse mortgage, no payments are due while the borrower remains in the home. Generally, the reverse mortgage becomes due when the homeowner dies or sells the home.
Reverse mortgages can be complicated and aren't appropriate for everyone eligible to obtain one. Since the loan is repaid from equity, your heirs' inheritance will have less value. Application fees, points and closing costs can be substantially higher than with conventional loans. Interest rates are usually higher and are charged on a compound basis. More is charged because the lender won't be repaid until the loan pays off in the future. Another important difference is that the interest on a reverse mortgage is not tax deductible until the loan is repaid.
Some lenders will not only want repayment of interest and costs at the end of the loan, but also a participation in the equity over and above these items. Equity participation is not universal and should be avoided. Given the current downturn in the real estate market, before taking out the loan, consider what happens if the value of the home doesn't equal the amount owned on the reverse mortgage when you die or move. One solution is extending the life of the loan to allow for appreciation in value to occur.
Because of the substantial differences and potential advantages and disadvantages of reverse mortgages compared to standard loans, keep these final two points in mind. First, be sure to seek the advice of a financial advisor, real estate attorney or knowledgeable accountant when considering a reverse mortgage so that loan and borrower will be a good fit. Second, deal only with a reputable, well-established and highly recommended mortgage broker or lender. As with any business decision, do your homework, get good advice and read the fine print.