Reverse Mortgage Pros and Cons

Retirement can be good or bad, depending on how much money you have saved all these years. After all, once you're out of your line of work, the chances of finding another job become close to impossible. Or even if you can find one you may not be in the physical condition necessary to complete the necessary tasks involved. After all, when we reach our retirement years we are supposed to enjoy these golden years, not work through them.

In order to afford retirement you have to live with your pension and savings. However, what if you end up with not enough money to support the remaining years? With no job and thus no salary to call upon, there's hardly any lender out there who's willing to give you the cash that you need unless we're settling for a reverse mortgage, which has its own reverse mortgage pros and cons.

Before we get into advantages and disadvantages of this loan, let's try to define first what is a reverse mortgage. As its name implies, it's the opposite of your typical mortgage.

When you take a regular mortgage, you have to pay the interest every month, together with the principal amount. However, as you pay your debts to the lender, the value of your home will also increase, depending on the total amount you've already covered. When the loan ends after a specific period of time (the maximum of which is 30 years), you are already debt free, and the property is already yours. The lender can no longer run after it.

The reverse mortgage has a completely opposite process. This type of loan is often given to those who are already seniors. Thus, the home by then has been fully paid or significant equity. They will then have to apply for a mortgage to get some money equivalent to the equity of their home. The cash can be lump sum or spread over a number of years. This is basically tax free; however, until the owner of the house dies or moves to another place, he or she continues to acquire debt.

Most of those who are nearing retirement would already be keeping tabs on reverse mortgages. This is because it offers plenty of great benefits for them. First, you don't have to be too concerned about your credit history or even your salary. They no longer matter. There are only three basic requirements when it comes to reverse mortgages: you have to be the owner of the house, it is your primary residence, and you have to be 62 years old and above.

You also have more freedom on what to do with the money. While conventional mortgages are used to pay for their own homes, the money that you get from reverse mortgage can be utilized for whatever it is that you fancy. You can travel, buy another home, pamper yourself for months, send someone to school, or find a good retirement home--the lender would not really care about your intentions for the reverse mortgage loan.

As mentioned, there's no need for you to pay interest payments for several years--or even until you die. You also don't have to pay the government taxes since the money you receive is not really considered as your regular income.

Despite the benefits, though, there are still a number of downsides with regards to reverse mortgage. Topping the list is the fact that the loan doesn't include owners of trailers, second homes, and resorts. For example, if you have considered your mobile home for years, and you wish to avail of a reverse mortgage, expect your application to be rejected. Moreover, if you've taken an early retirement package at age 50, you still have to wait for 12 years before you can be eligible.

Even if there are no interest payments or up-front fees for the loan, you still need to pay closing costs, which will be added into your reverse mortgage. Reverse mortgage closing costs often exceed that of traditional mortgage loans; some as high as 2 times, so get the numbers up front. This is another cost that you have to pay later on.

Here's another one you should watch out for. You have to think about a reverse mortgage very seriously if you're considering giving the property to your children or designated heirs. Otherwise, when you die, it will go to your estate. If it's not going to be refinanced by it, the house will directly go to the lender, who will be in charge of disposing the property and recovering whatever payments need to be covered.

In many cases a reverse mortgage is not a bad idea. However, you need to be properly guided and fed with the right information before you take the reverse mortgage plunge. This could mean talking to a mortgage counselor or an expert in reverse mortgages. If you have a financial advisor you have worked with in the past, his or her guidance can be very helpful. Make sure that if you have heirs that they understand your needs. It's important to put yourself first when it comes to your finances, but be sure to consider all the factors involved. Getting some professional guidance can be invaluable when it comes to major financial decisions like getting a reverse mortgage.