Most homebuyers and owners are familiar with typical mortgages, in which monthly payments are made to the lender. But some may not know the ins and outs of a reverse mortgage, which is a financial product that allows homeowners to convert part of the equity of their home into cash without selling their home or paying additional monthly bills, the Federal Trade Commission explained.
Reverse mortgages are a great product in financial planning for seniors who are 62 and older and need more income, whether to finance a home improvement project, pay off the mortgage, gain more retirement income or pay for healthcare expenses. The product involves owners receiving money from lenders, and the borrower typically doesn't have to pay that money back for as long as they live in the home.
Most reverse mortgages are tax-free and have no income restrictions, and they only must be paid back when the borrower dies, sells the home or no longer uses that home as a primary residence.
Reverse with reservation
Seniors should educate themselves before opting for a reverse mortgage, because there are a number of factors that either make them attractive or a bad option. For example, the more home equity seniors use now to fund a reverse mortgage, the less they will have in the future to pay for other emergencies or needs.
Things like vacations or elaborate home upgrades may sound like a great way to use funds from a reverse mortgage, but remember that future moves to assisted living homes or increased medical expenses are much more important to save for.
Opting for a reverse mortgage
Once seniors have determined that a reverse mortgage is right for them, they have some options to choose from. For example, according to the AARP, there are many ways seniors can obtain finances from such a mortgage, including:
- A single lump sum;
- A regular monthly cash advance;
- A credit line account that lets seniors decide when and how much of your available cash is paid to them; and
- A combination of the above.
Seniors who are looking into reverse mortgages should stay on their toes and be on the lookout for people who are trying to scam them. Fraudsters often target seniors' finances, and reverse mortgages are no exception.
"If anyone is trying to sell you something and recommending you use a reverse mortgage to pay for it, that's generally a good sign that you don't need it and shouldn't be buying it," the AARP warned. "Be especially wary if you don't fully understand what they are selling or aren't certain that you need it."
Consumers also should keep in mind that most often, they have at least three business days after closing a reverse mortgage deal to cancel for any reason and without penalty. Seniors must notify the lender in writing sent by certified mail. They also should ask for a return receipt to keep with their financial documents to ensure that the lender will return any money they've paid for financing.
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