Are Reverse Mortgages Too Good To Be True?

Reverse mortgages can be an excellent tool for freeing up cash resources in a time of need. However, they aren’t an appropriate financial tool for everyone and, like any type of loan, they come with some inherent risks. With so much information available in the lending sphere, many homeowners gravitate to the easily-demonstrated benefits of a loan product. However, it’s also important to investigate any potential downsides before making a financial commitment.

Reverse mortgages are available to those who are 62 or older and have a significant amount of equity in their homes. With this type of loan, homeowners borrow against their own equity, and can receive either a lump sum or monthly payments to supplement their cash income. The money can be used for anything the borrower desires, though many reverse mortgage holders use the funds for home improvements. The loan will be repaid only once the borrower’s home is sold – there are no monthly loan payments due.

The benefits of a reverse mortgage can appear too good to be true, and they certainly need to be balanced against the following drawbacks:

Reverse mortgages accrue interest. Although borrowers aren’t required to make monthly payments toward a reverse mortgage, the loaned amount still accrues interest. This typically isn’t problematic for folks who plan to remain in the home long-term. However, for reverse mortgage holders who may sell in the near future, it can put a dent in the amount of profit that will be received from the sale.

The loan amount offered may be less than expected. Even for prospective borrowers who own their homes outright, reverse mortgages are limited. Most lenders won’t loan more than 80 percent of the home’s appraised value, though the number varies across lenders. The borrower’s age can also be a factor, as well as market fluctuations in interest rates.

Like any financial instrument, reverse mortgages deserve attention to both the pros and cons they offer. Interested homeowners should meet with several lenders to discuss loan terms, benefits and drawbacks before deciding whether a reverse mortgage is just right…or too good to be true.

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