Making Sense of the Reverse Mortgage: Is There Something Wrong?

Reverse MortgageReverse mortgages, or the Home Equity Conversion Mortgage (HECM), provides senior citizens the option to utilize their home’s equity as cash. This allows sexagenarian homeowners to improve their financial standing by doing away with the monthly mortgage payments. In a nutshell, it sounds quite advantageous, right?

The thing to consider here, though, is that it can work two ways. A reverse mortgage can either help or hurt an old person who may not be as well-versed with the language of mortgages and financials.

First Step: Understand the Intricacies

The possibility of losing your home is no laughing matter. To better comprehend the situation, it is imperative that you understand the details of whatever it is you are getting into, such as mortgages. When money is involved, you can never be too sure, right?

Primaryresidentialmortgage.com lists down the requirements for a Reverse Mortgage:

  • The borrower must be of the right age—62 and older.
  • The borrower must have the financial capacity to pay for his or her ongoing property expenses, such as taxes and insurance.
  • The borrower must be using the property as his or her primary residence.
  • The borrower must own the property, or at least, have a small mortgage balance.
  • The borrower must not qualify as a delinquent on any type of Federal debt.

While it may seem beneficial to a fault, for a 60-year old to use their home’s equity and cash in, the issue they fail to take into account is paying back the loan. Generally, for every dollar you take out, your debt is already growing via interest. This ballooning debt reduces your equity.

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Deborah Burkham, an assessment coordinator for an organization protecting old people from financial fraud, says that a lot of people believe their equity will increase. She goes on explaining that the typical scenario is this: the loan earns 5% on annual basis, while the home appreciates at 3%.

You can’t blame these old people, though, given their life expectancies. What else do they need to worry, since the attractive distinction of a Reverse Mortgage is that you don’t have to repay it immediately?