The Reverse Mortgage: Is This an Option for You?

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By Elli Davis, June 3, 2009

Reverse mortgages are a special type of home loan that allows you to turn your home equity into cash. Lately - at least before the crash, reverse mortgages have been very popular in the UK where a reverse mortgage is called "Equity Release". It is basically aimed at seniors over 60 years old that, for whatever reason, need to raise more cash, but don't want or cannot afford to pay monthly repayments.

How it works

The reverse mortgage is simply an advance payment on your home's value that accumulates interest. You or your surviving spouse can live there as long as you wish, because the debt is not due until the house is sold or you (or your surviving spouse) move out or die. You can borrow between $20,000 and $500,000 up to maximum of 30% of your home equity (or up to 40% if you are over 70).

Pluses and minuses

Let's have a look at some of the pluses and minuses of raising cash via a reverse mortgage.

Reverse Mortgage Advantages:

Tax-free loan.
No monthly repayments.
The house title remains in your name.
Great way of paying your mortgage or other debts and getting rid of the monthly payments.
You have an option to pay the interest as the time goes, so that your debt doesn't grow.
You are allowed to move your reverse mortgage onto another property, partly or fully.
You may quit at any time, free of charge, as long as you stayed for 3 years or longer.
The interest rate decreases as the time goes.
Even if you owe more than your house equity is, the bank cannot foreclosure. You will never pay more than a fair market value of your house, even if your house decreases in value over time.

Reverse Mortgage Disadvantages:

Set up fee of about $1,300.
Within a few years the loan can be as high as the equity you have accumulated over many years. Example: at the interest rate of 10%, $50,000 loan doubles every 7 years. That's $100,000 after 7 years and $200,000 after only 14 years. Even if the value of your house keeps growing, the loan might eat up all the equity.

To summarize, the reverse mortgage is a great option if you need to raise cash quickly, are house-rich but cash-poor and with limited income. Unlike with the home equity line of credit you cannot lose your home as long as you live there, plus your financial obligations or your income does not matter. On the other hand, the reverse mortgage can be very expensive loan if you take it when you are still relatively young and do not want to or cannot periodically pay off the interest rate, because within quite a short time your loan will double and quadruple, wiping out most of your home equity.

Always seek financial advise before securing a loan on your property.