Pros and Cons: Reverse Mortgages

Reverse mortgages converts home equity into a ready source of credit line for elderly Americans who are feeling the pinch of today’s economic difficulties. It has given senior Americans a vital lifeline. With the dwindling value of their pensions and most of them unemployed, reverse mortgages have become a popular option because of the relative ease of qualifying for the loan. Reverse mortgages only require that applicants be 62 years in age or older and does not require high credit scores.

Advantages:

• Easy Pre-qualification

Qualifying for a loan is easy; applicants must be at least 62 years of age and have established equity on their homes.

• Flexible Payment Options

Receive payments annually, monthly or in a lump sum. This gives you the opportunity to decide how best you can take advantage of your loan.

• No danger of foreclosure

Unlike mortgages or home equity loans, borrowers face no risk of losing their homes because of deferred payments.

• Increased lending limits

The Department of Housing and Urban affairs announced that loan limits starting November 6, 2008 will be increased to $417,000 and all loans for 2009 will have a $625,500 limit.

• Federally Insured

Home Equity Conversion Mortgages are the most popular type of reverse mortgages. This is essential because if your lender defaults, the lender still is assured of getting payments.

• Tax Free

Money from a reverse mortgage is considered as an additional fixed income or a lump sum; hence they are typically tax free.

Disadvantages:

• Loan Limit

New revisions in the economic stimulus package have raised loan limits. The maximum loan available for reverse mortgages has now been raised to $625,500. Homeowners with larger home equity may not be able to tap the full values of their homes.

• High Fees

Reverse mortgages come with the promise of easy access. One drawback with these loans is their relatively higher fees and interest rates.

• Risk of running out of money quickly

Reverse mortgages are available for people who are at least 62 years of age. The risk of running out of funds is great if funds are not managed properly.

For many elderly Americans who find themselves unemployed and need a source of funds for everyday living expenses or wish to establish a new business, getting a reverse mortgage may be the only avenue open to them.

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