As baby boomers get older and start thinking about how to finance their retirement, reverse mortgages are becoming more popular. For people over the age of 62 who have 75% equity in their home, a reverse mortgage can be a good way to get tax-free income that does not have to be repaid. But along with every good thing comes some bad and there are some dangers of reverse mortgages that you should be aware of. Although they are a good opportunity for most of those who qualify, you just want to make sure you are fully informed about all the options.
A reverse mortgage allows seniors to use the equity in their home and receive tax-free income without having to give up ownership, or make a monthly payment. The money that is received is paid back when the home is sold, usually after the owners have died or moved into other living arrangements. The amount of money received depends primarily on your age, how much the house is worth, the interest rate, and the current mortgage balance, if any.
You can receive the money basically three different ways: a lump sum payment, fixed monthly payments, or a line of credit that can be accessed whenever needed. There are dangers of reverse mortgages associated with each of these options.
A lump sum payment
When you receive a lump sum payment you need to have a good steward of your money so that it will not run out.
Fixed monthly payments
Fixed monthly payments are good because you know the exact amount of money you'll be receiving each month. The dangers of fixed monthly payments for reverse mortgages is that inflation is not taken into account. The first payment amount is the same as the last payment amount wherever the payments last two years, 10 years or 20 years.
Line of credit
As with the lump sum payment, a line of credit is exhaustible. Once you've reached the limit, there is no more money available unless you refinance.
Another danger of reverse mortgages is in the terms of the contract. Some of these contracts can be very confusing, it is highly recommended to get counseling before entering in to this type of loan.