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In today's world, it's important for seniors to have as much income as possible each month. Medical bills, groceries, utilities and more are all increasing in price, creating dire financial straits. However, one of the hottest trends in helping seniors overcome financial problems is reverse mortgages. As the baby boomer population ages, many wonder if reverse mortgages make good financial sense. While they have many pros and cons associated with them, ultimately it comes down to individual financial situations and future plans when determining if reverse mortgages are a smart choice.
Who is Eligible for a Reverse Mortgage?
Boomers age 62 or older are eligible for reverse mortgages. Along with the age requirement, the person must plan to continue living in the home for as long as possible. They also must already own their home, and plan to use the equity they receive for living expenses. The biggest advantage of this is giving people money for home repairs, property taxes or other expenses. The money received can be given in a lump sum, monthly installments or as a line of credit, to be used as needed.
Are Reverse Mortgages Expensive?
While in many ways easier to obtain than traditional bank loans, reverse mortgages do come with a high price in some cases. Interest rates can be much higher on these mortgages, allowing interest to accrue at a faster rate. The disadvantage of this is that when the loan comes due, either after the person dies or is no longer able to stay in the home, the amount owed can be much more than originally thought. This can place an added burden on heirs or the homeowner, forcing the sale of the home to cover the costs. Along with high interest rates, these mortgages have very expensive closing costs and service fees, which can amount to over 10 percent of the overall loan.
Watch Out for Scams
Many boomers, when desperate for money, will jump at the first offer that sounds too good to be true. Unfortunately, offers that sound too good to be true usually are just that. In the past, many reverse mortgage companies pressured applicants to buy additional products that were often not needed, such as deferred annuities and other types of insurance. These companies would insist that the mortgage would not be approved unless the person purchased these products. However, the only insurance required for a reverse mortgage is homeowners insurance, which must be maintained for the duration.
One of the provisions of having a reverse mortgage is that the house must be properly maintained. This means any repairs, such as a new roof or plumbing repairs, be made in order to keep the home in great shape. For some seniors who may have physical or financial limitations, this can prove hard to do at times. Another potential problem can be property taxes, which may be so high a homeowner may not be able to afford them.
While more boomers than ever are involved in physical fitness, an unexpected health concern can appear at any time. If this happens after a reverse mortgage is taken out, many problems can result. One stipulation of a reverse mortgage is that the person may not live outside of their home for more than one year, and if they do so the balance of the loan becomes due. A health problem that could result in a nursing home stay could potentially spell financial disaster, resulting in the sale of the home.
While reverse mortgages offer baby boomers the chance to tap into the equity of their homes to relieve financial pressure and provide regular income, they also have numerous pitfalls that could result in higher than anticipated expenses and even the sale of the property. For boomers considering this option, it's a good idea to do much research and plan carefully before signing on the dotted line.
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