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A guide to reverse mortgages pros and cons

What is a reverse mortgage? A reverse mortgage loan, also known as Equity Release, is a loan availed by homeowners over 60 years of age whose income is insufficient to meet their expenses. The homeowners pledge their home with the lending company. The loan is not repaid (principal and interest) until their death or till the property is sold.

Pros of a reverse mortgage loan

It helps senior people lead a dignified life. They can easily meet their financial commitments without having to worry about loan repayments. A senior needs to possess a home with clear titles and with all insurance and taxes paid, to avail the best reverse mortgage. Nothing else matters. The homeowner can live in his home until his death without repaying the loan. A reverse mortgage can be structured to suit needs. For example, the mortgage can be in the form of monthly payments to the homeowner. This can work as an extra helpful income supplement to the pension check. A reverse mortgage loan can be squared up anytime. In the event of the homeowner’s death, his legal heirs can choose to repay the loan without selling the home. It can reduce the inheritance tax paid by your estate. Moreover, reverse mortgages are tax free. Many reverse mortgages are backed by NNEG (No Negative Equity Guarantees). NNEGs guard the borrower against any adverse downward movement in real estate rates. That's not all - here is one more advantageous information on reverse mortgages: If interest rates fall, the borrower can avail of another reverse mortgage loan at a cheaper rate and repay his old loan.

Cons of a reverse mortgage loan

A reverse mortgage loan carries a high origination cost, which becomes part of the loan. This part is subject to interest accrual. So, technically, the senior ends up paying interest on these costs, which offer no value at all. The home must be worth a certain amount to be eligible for a reverse mortgage. This is how reverse mortgages work. If your home is below the set sanction-able value, you will not get a loan. In fact, the recession (2008-11) has made mortgage companies raise the eligibility levels, thereby pushing reverse mortgages out of many senior's reach. If you are planning to sell the property and repay back the loan, then it may not work, especially in times like these when real estate prices are at rock-bottom. Moreover, if you are young, a reverse mortgage may work to your disadvantage. Some companies persuade seniors to get a reverse mortgage and invest the funds in another scheme. This can eat up the funds and the senior can be left with nothing. An upfront fee is deducted from the loan amount.

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