A reverse mortgage is a complex financial instrument that should only be used after a borrower fully understands the potential impact such a loan could have on their life. This idea is a common component of reverse mortgage product training, and a borrower will gain additional clarity on this through conversations with a loan officer or reverse mortgage advisor.
However, certain situations could lend themselves to the idea that a reverse mortgage is inherently good or bad for an individual, and determining when the product could be considered either was the subject of a recent published column. by the Motley Fool. .
“Relatively young homeowners should make the decision to get a reverse mortgage with caution,” the column read. “You have to be at least 62 years old to qualify, but even that may be too young for some. If you go over the term of your loan and can’t afford to pay off the debt, you could lose your home and have to move out. A reverse mortgage can also be a bad idea if it’s important for you to leave more assets to your heirs. The loan balance, including interest, could leave them little or nothing to inherit that particular asset. “
The column also warns against taking out a reverse mortgage on behalf of only one spouse in a married couple, which may unnecessarily complicate the process for the other spouse if they wish to remain in the accommodation after death. of the “borrowing” spouse.
“If the loan is a [Home Equity Conversion Mortgage (HECM)], an eligible surviving spouse can stay in the house, ”the column reads. “To benefit from it, the spouses must be married at the time of signing the loan and meet other criteria. Even if the surviving spouse is allowed to stay in the house, the lender will not release any more money and the loan will not have to be repaid until the surviving spouse moves, sells, or dies. For other types of reverse mortgages, the lender may be allowed to recall the loan owed on the borrower’s death, forcing the surviving spouse to move out.
In terms of finding out when a reverse mortgage might be a good idea for a particular borrower, the column lists four basic criteria: whether the homeowner has a lot of equity or whether the original mortgage is paid off; whether the borrower wants or needs additional cash each month; if the borrower does not expect to live in the home longer than the term of the loan; or if the borrower understands how a reverse mortgage can affect the home as an asset bequeathed to an heir.
“Reverse mortgages have their value, under the right circumstances,” the column says. “Just be sure to research how a reverse mortgage will affect your finances – and your family – before signing on the dotted line.”
Read the Motley Fool column.