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Reverse Mortgage – Be Sure You Need It Before Applying For One
By Charles Essmeier
Reverse mortgages used to be considered the last resort of desperate retirees
who needed to borrow against their home equity in order to pay for medical
expenses. With home prices across the country rising at astonishing rates,
more and more retirees, aged 62 and over, are taking out reverse mortgages
to fund better retirement living. A reverse mortgage works more or less the
opposite way from a conventional mortgage; the borrower receives payments
from the lender in the form of a lump sum, a line of credit, or monthly
payments. The amount borrowed constitutes a lien against the home must be
repaid upon the death of the borrower, or when the home is resold. There are
costs associated with a reverse mortgage, however, and potential borrowers
should be aware of these when considering taking out such a loan, particularly
if the borrower takes out a line of credit.
All loans have fees associated with them. There are home appraisals,
paperwork fees, mortgage insurance fees, and additional "points" added to the
cost of the loan. In general, the costs of taking out a reverse mortgage are
higher than those associated with a traditional mortgage. There are several
reasons for this, including the fact that the time period for receiving
repayment of the loan is indefinite, typically depending on how long the
borrower lives. This uncertainty is added into the loan in the form of additional
fees.
Most people who take out a reverse mortgage opt to take their funds in the
form of a line of credit, rather than a lump sum or monthly payments. There
are advantages to a line of credit, which allows the borrower to use the funds
by simply writing checks against the loan. The primary advantage is that the
borrower only uses the funds when he or she needs them. Because of this,
interest only accrues on the money if the borrower actually writes checks.
Borrowers should be aware, however, that the costs of the loan, which can be
substantial, apply even if the borrower doesn't write any checks against the
loan. If the homeowner takes out a line of credit and decides to sell the home
shortly thereafter without ever having written a check against the loan, the
borrower will not owe the lender any interest or principal, but the borrower will
lose the money paid for the cost of the loan, which is not refundable. If the
borrower rolled the costs into the loan itself, they could owe payments even if
they never wrote a check.
In short, borrowers considering taking out a reverse mortgage should make
sure that they plan to stay in their home for quite some time and that they
actually need the money from such a loan. A reverse mortgage is a great idea
for those who have a specific purpose or use in mind, but as an emergency
source of "rainy day" funds, it can be an expensive choice.
©Copyright 2005 by Retro Marketing. Charles Essmeier is the owner of Retro
Marketing, a firm devoted to informational Websites, including End-Your-
Debt.com, a Website devoted to debt consolidation information and
HomeEquityHelp.net, a site devoted to information on home equity loans.
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