As people live longer, many face the reality that their retirement savings may not be enough to sustain their expenses through their lifetime. In the past several years, reverse mortgages have gained popularity as a way for older homeowners to tap into their home equity to meet their financial needs. Reverse mortgages can give some homeowners who are 62 years of age or older, a source of income based on the home equity they have accrued over the years.
The amount of money available from a reverse mortgage depends on the specific loan plan selected. Payment options include:
- A one-time lump sum;
- Equal monthly payments over a fixed period of time;
- A line of credit that allows the homeowner to decide how much cash he or she receives and when to receive it.
Factors that determine the loan amount also include the age of the homeowner, interest rates, the value of the home and any closing costs required on the loan.
Since the homeowner no longer makes a monthly payment, the reverse mortgage loan balance continues to rise as funds are paid from the loan and interest accrues on the existing balance. If not monitored, this can cause the loan balance to catch up to the home's equity rather quickly.
Therefore, it is important to keep careful records of how much money is being used.
For example, according to the American Association of Retired Persons (AARP) - based on a home valued at $200,000 - reverse mortgage loan advances of $1,000 per month, with an interest rate of 0.5 percent per month, will reduce a homeowners' equity from $195,602 to $131,349 over a 10-year period. This does not include the amount paid for loan closing costs, mortgage insurance premiums, fees or closing costs when the home is sold.
Reverse mortgage loans must be repaid in full, which includes all interest and any additional charges, when the last living borrower dies, sells the home or moves to another location.
At first glance, a reverse mortgage may seem like a great opportunity for getting something back after years of making mortgage payments. However, as with most financial products there are different types of reverse mortgages; each having advantages and disadvantages that should be examined before a homeowner decides to take out such a loan. For this reason, reverse mortgage applicants are required to receive loan counseling to make sure they understand the loan terms and don't put themselves in the position of losing their retirement nest egg.