Reverse Mortgage Loans – What You Should Know

A reverse mortgage loan is one in which a finance company buys the equity in a home. While the homeowner is alive, the company will make monthly payments to the owner. The homeowner may alternatively opt to receive a lump sum payment. After the homeowner passes, moves, or sells the house, the loan becomes due. The home does not have to be paid off to get a reverse mortgage loan, but it usually requires a good deal of equity.

These loans provide a way for senior citizens to take equity out of their home without selling the home. This has the benefit of allowing them to live a better life without the stress of financial obligations; at least regarding the mortgage. It gives them more money on which to live, and maybe enjoy some things they might not otherwise be able to afford. When the loan comes due, such as at the death of the homeowner, the house is sold and the loan is paid. In that case, the heirs receive any additional monies. If the loan is larger than the sale amount, the lender absorbs the loss.

There are pros and cons regarding reverse mortgage loans. They are expensive to initiate, costing nearly twice as much as traditional loans. Additionally, the loans create compounding interest. The borrower makes no monthly payments, so the interest is essentially added to the principal. The next month, interest is due on the higher amount of principal. These loans can be quite confusing, and a deceptive finance company can make the confusion even worse. Caution is advised, as is an attorney and counseling before making a commitment to a reverse mortgage.

Overall, if properly handled, reverse mortgage loans can be great for the elderly; they can be life changing. They are certainly not for everyone, though. Each person has a unique situation which must be taken into consideration before initiating one of these loans.