What is a reverse mortgage?

A reverse mortgage is often advertised as a way for seniors to receive extra cash every month. The cost of living today is higher than the one anticipated by the people who calculated the retirement pension. This means that the retired senior citizens could not afford to keep their standard of living. One of their options is to move to a low-income neighborhood where the cost of living is more affordable or to get a reverse mortgage which is a type of loan.

The reverse mortgage is essentially a loan that a senior citizen can obtain when he or she has reached 62 years old. Using the equity of the house, a senior citizen is eligible for a reverse mortgage. This type loan is offered by local governments to help the citizens pay property taxes or home repairs. But today, a considerable number of banks and mortgage lenders are offering reverse mortgages.

On the surface, a reverse mortgage is the ideal solution for the retiree who needs extra cash, perhaps for medicine and other unexpected expenses. But when the details of a typical reverse mortgage are examined, it becomes clear that the borrower is at a considerable disadvantage. For example, not everyone is eligible for a reverse mortgage. The homeowner-borrower must own a home which is either fully paid or has a very small mortgage loan left. This will assure the lender that the home has equity. The homeowner must also be living in the said home for a greater part of the year, which will ensure that the home is being attended to and not allowed to deteriorate and devaluate.

How does a reverse mortgage work?

First, the homeowner who wants a reverse mortgage must meet the age requirement and that the home must be either a single-family unit or a two-to-four occupied unit. A mobile home cannot be accepted as collateral against this type of mortgage. Then, once the home application is approved, the homeowner can chose a method on how the loan will be received. It can be released all at once or monthly. Some lenders also offer the option of having a credit line for the loaned amount.
If the chosen method of release is monthly, the lender sends in checks or deposits money in the homeowner’s bank. This is the reason why the term “reverse” was utilized. Instead of the borrower making monthly payments, the lender is the one which is sending monthly payments. And while the loan is being released, the homeowner can stay in his or her home until death or until he or she permanently leaves the home.

However, the simplicity of the process does not indicate instant approval. The homeowner-borrower must pay certain fees, such as the application fee, the insurance fee, the origination fee, the closing fee, and the interest. All these fees are added to the total loan.

At this point, the reverse mortgage loan is considered paid and the home will be sold to the lender. Since the lender has already extended a loan, the home will be sold at an extremely low price, perhaps less than 50% of the market value. If the homeowner has an heir, he or she will be entitled only to a small portion of the proceeds of the sale of the house.

Reverse mortgage disadvantages

The reverse mortgage is not just a controversial financial arrangement but also suspicious one. It can be viewed as a financial tool that exploits the financial weakness of the elderly. The lender of the reverse mortgage has an unfair advantage over the elderly homeowner while the homeowner eventually relinquishes the home to the lender for an amount equivalent to roughly half of the home’s equity. To better understand the deception that a homeowner gets into when he or she takes out a reverse mortgage, here is the real nature of this financial arrangement