Reverse Mortgages - Are They Only For Suckers? By Felicity Walker At Isnare.com Ezine Articles

It sounds too good to be true- a home loan that you never need to pay back. No monthly repayments, nothing - for as long as you're alive or live in your home. Welcome to a reverse mortgage - it may sound incredible, but that's basically what a reverse mortgage is about.

Basically, reverse mortgages have been developed in recent years because of the "greying" of the population. People are living much longer lives, which means that many older people are barely surviving day to day, and yet are living in houses that over an extended period of time have risen enormously in value. It's a classic case of asset rich, cash poor.

The idea of a reverse mortgage is to give that elderly person a chance to use some of the equity in their home, and hopefully make life a little easier for them. It may give them the chance to perform much needed maintenance on their home, or perhaps buy a car or go on a holiday. The loan can be used to set up investments to help supplement their income.

As most older people are no longer working, they were previously locked out of the mortgage market because they had little income. A reverse mortgage, however, doesn't require any monthly payments, and so the borrower's level of income is unimportant. Basically, instead of the borrower making a payment each month, the interest is added to the outstanding balance of the loan. Then, when the borrower dies or sells the house, the loan is paid out. Simple, and very effective.

You can draw the money from your reverse mortgage in a couple of different ways. You can draw down all the funds immediately, and so have a large lump of cash to invest or spend. Or, you can receive a monthly cash advance on the loan. So, for example, if you had a reverse mortgage of $50,000, you could draw down $1,000 a month for 50 months. That sort of cashflow could certainly make a difference to the lives of many elderly people.

Some reverse mortgages also operate like a huge credit account. Basically, you can withdraw an amount whenever it's required, rather than having any set arrangements. It's also possible to set up your mortgage with a combination of payout methods.

The important thing to remember is that no matter how you draw down the loan, you don't need to make any monthly repayments. In some ways, it's better to draw down the funds over time, simply because the interest that accrues against the loan will be lower to begin with. This means that the balance of the loan won't rise quite as quickly.

But don't get too excited unless you're at least 60 years of age - generally that's the minimum age at which you can apply for a reverse mortgage. Also, the older you are, the higher the percentage of your home's value that you can borrow. So at 60 years old you may only be able to borrow 15%, but at 70 years old you may able to borrow 30%.

As with anything that sounds too good to be true, there is a downside. With a reverse mortgage you are effectively spending the equity you have in your home, and not repaying it. That means that over time your equity will decrease. As time passes, the interest accrues more quickly, and the debt will rise faster. So if you're planning on leaving a nice little nest egg to your children when you pass away, that nest egg may be seriously depleted. It also means that if you need funds to buy into an aged care facility, your equity in your home will be much lower, which may restrict your choices.

Of course, there are always going to be exceptions to this. Some houses can rise in value fast enough to keep ahead of the loan, and so equity levels may remain the same or even rise. However it's always best to be prepared for the worst case (i.e. very little or no equity remaining) and also read all the fine print. If the fine print doesn't make sense, get your legal professional to explain it to you.

A reverse mortgage can be a wonderful way to improve the later years of your life, particularly if you're struggling to make ends meet each month. Just make sure you understand exactly what you're doing and how it works, and what effect the reverse mortgage will have on your equity in your own home over time.

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