Considering a Reverse Mortgage: Understanding Your Options

By Karen Lawson
CMR Columnist

Recently, homeowners have enjoyed record low interest rates, and have refinanced their home mortgage loans to pay off debts, remodel or repair their homes, or finance small businesses. As mortgage refinance rates continue to rise, traditional refinancing may not be as accessible for homeowners living on a fixed income. If you (or your spouse) are at least 62, you may be able to access your home equity through a reverse mortgage loan.

How Does a Reverse Mortgage Work?

A reverse mortgage is a mortgage loan that is used to refinance your existing home loan, and supply access to your home's equity through either a lump sum payment or monthly installment payments to you. It's important to understand how a reverse mortgage works, as well as its impact on your present and future financial situation.

Here are a few points to keep in mind:

  • No payments are due until you sell or otherwise vacate your home
  • Interest will accrue and be added to the principal balance of your loan--your mortgage balance will increase, rather than decrease
  • When considering a reverse mortgage, it's a good idea to consult a financial advisor
  • Lender charges vary--generally, the more you borrow and the larger the amount of payout, the higher the lender fees; be sure you know how much you are paying in fees and charges, as these fees are part of the cost of your reverse mortgage loan

Lump Sum or Monthly Installments?

Depending on your financial needs and loan availability, you can choose a reverse mortgage product that provides a lump sum, or you can receive a monthly amount. If you want to remodel your home, or have a large expense on a one time basis, a lump sum may be your best option. An installment, or HECM, reverse mortgage can work well when you need additional income each month or have ongoing expenses.

It's important to remember that you are using the equity in your home. This will impact the amount you or your estate receives when your home is sold.

Source
Federal Trade Commission

About the Author
Karen Lawson is a freelance writer with more than 15 years of experience in mortgage banking. She earned an MA degree in English from the University of Nevada, Reno.

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