What is a Reverse Mortgage?

Reverse mortgages or becoming more readily available and popular as a financing option. These mortgages are generally used by older people who have accumulated a substantial amount of equity in their home. Most lenders require the borrower to be at least 62 years of age. Reverse mortgages are a good way for them to subsidize their retirement income.

The way a reverse mortgage works is by the lender making payments to you based on the value of the equity in your home as opposed to you making payments to a lender with a traditional mortgage. Taxes and interest are added to the amount that needs repaid, decreasing the equity in the home. The lender gets their money after the house is sold or when the owner dies.

Most reverse mortgages do not have to be repaid for a long time and some not at all, as long as you continue to live in the property. The amount you are loaned is based on your age, the value of your home and the current interest rates.

Your loan is usually disbursed in one of the following ways:

* A lump sum that is given to you or used to pay off debt or a combination of the two.

* Fixed monthly payments that will be made to you for a set period of time.

* Fixed monthly payments that will be made to you as long as you live in the home. These payments will be smaller than the ones in the previous option.

* As a line of credit.

* As a combination of a credit line and one of the payment options.

Some potential drawbacks of reverse mortgages are:

* You can only use your equity once. If you use it to live on and have an emergency later it will not be there.

* There can be substantial fees involved with reverse mortgages. There may be upfront fees as high as $5000 dollars. It is wise to do some comparative shopping when it comes to this type of financing.

* Your payment amount may not meet your needs. How much good will $100 a month do you if it is going to cost you the equity in your home?

* Your ability to receive government pay outs such as SSI and Medicaid may be affected.

* Make sure your lender is reputable. The names of reputable lenders can be gotten from the Department of Housing Urban Development.

* Upon death, if repayment has not been made, your home will go to the lender. This may not necessarily be a bad thing, but it is something to consider.

These are a few of the facts about reverse mortgages. These mortgages can be a big help if you need money later on in life, but they also come at a price. Only you can decide, based on your situation, if that price is worth paying.

Marjorie Salada is the owner of debtmanagement1.com, a website that contains information on debt consolidation, debt settlement, debt counseling and how to manage credit card debt.