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Anybody that has been watching television in the last few years have seen a commercial for a newly created financial product called a reverse mortgage.  These products are geared towards seniors and the commercials are very vague about what a reverse mortgage is, other than stating that it will get you the money that you need.  Although the commercials for the products state that they are a good way to obtain additional financing, many people believe that the reverse mortgage was created to prey upon the vulnerabilities of senior citizens who are often living on fixed incomes and provide a way for financial institutions to drain the equity out of a homeowner’s house.

What Is A Reverse Mortgage?

A reverse mortgage product allows a homeowner to take equity out of the home in the form of a lump sum payment or several equal payments spaced out between specified periods of time.  There are no restrictions on what the money can be used for, although many of the people that obtain the loans use the money for their living expenses or to fund a major project that they are having completed.  The amount of the loan is based on the amount of equity that the homeowner has in the home at the time of the loan and only certain percentage of the equity can be obtained through the reverse mortgage process.

Only senior citizens that are homeowners and have a significant amount of equity in their homes will qualify for a reverse mortgage.  In fact, a person is not able to apply for this type of mortgage product unless they are at least 62 years of age and if the person is older, they will qualify for a higher loan amount than if they were closer to the age of 62.  There are no payments due on the loan during the lifetime of the homeowner unless they decide to transfer ownership of the home, at which point the entire principal and interest of the loan becomes due.

What Are The Negative Aspects Of A Reverse Mortgage?

One of the biggest negatives associated with obtaining a reverse mortgage is the huge fees that are charge for originating the loan in the first place.  Because there are no payments due on the reverse mortgage until the home has transferred ownership, there is no way to tell how long the loan will be in effect, which could be many years or only a few months depending on the circumstances.  In order to ensure that the financial institution will make money on the reverse mortgage, they will charge high fees and take them out of the initial payment to the homeowner.

Another negative aspect of the reverse mortgage is that in many cases, the financial institution ends up holding all of the equity that was in the home, effectively preventing the homeowner from leaving the home to another person in their will.  People that do not have any close relatives or do not intend on leaving their home to a family member after they have passed on may be okay with this, but people that would like to leave their home to their children or their grandchildren will find that whoever they leave their home to will owe a great deal of money to the lending company when the home changes hands.  Whether a reverse mortgage is right for a person depends on their situation at the time and what their plans are for the future, but it is important for the person to take all of these things into consideration when deciding if they should take out a reverse mortgage.