A reverse mortgage is a loan that allows seniors older than the age of 62 to access part of the equity in their homes. This loan can come in the form of monthly payments, a lump sum or a revolving line of credit. The borrower is under no obligation to repay the loan until he or she dies, stops living in the property, or the home is sold. Repayment is also required if the borrower decides not to keep the home in good repair or pay for insurance and taxes.
These mortgages can be a good idea for some, but they're far less safe than they sound for many senior citizens, including some of the baby boomers. Boomers aged 62 to 64 represent more than 20 percent of applicants for reverse mortgages. In 1999, only 6 percent of applicants were from this age group. Nearly half the applicants for reverse mortgages are under the age of 70.
The problem with taking out a reverse mortgage at a relatively young age is that homeowners often find themselves unable to keep up with their property taxes. Many also suffer from health problems that prevent them from living on their own. As soon as they move into the home of a relative or into assisted care permanently, their loans come due. Homeowners can end up with little to no equity remaining in their homes.
Many of these borrowers aren't choosing reverse mortgages for the right reasons, either. These loans were intended to help elderly people close to death to live out their last few years without discomfort or the risk of losing the family home. Unfortunately, many borrowers are using reverse mortgages to cover short-term shortfalls.
These loans have higher relative costs to younger borrowers, who receive less money for all the same upfront costs and fees. A person whose home is paid for and worth $250,000 might receive a $141,000 lump sump payment at age 85, but would get only $103,000 at age 65. If that person decided to receive monthly payments, the difference between the two is even larger.
Read more at Forbes. [3]
