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Do You Understand How A Reverse Mortgage Works? - Four Questions to Ask Before You Apply

09/28/2010

A reverse mortgage is an excellent way to unlock the equity stored up in your home.  But there are many ways to do this, including various refinance options.  If you want to know whether a reverse mortgage is the best option for you, answer the following four questions.

1. Do you understand how a reverse mortgage works?  Maybe you've just heard a sales pitch from a local lender regarding the benefits of a mortgage that "pays you back the full price of your home!"  Sounds great.  But make sure you truly understand the details of a reverse mortgage before you pursue such an arrangement.  A reverse mortgage is very different from a conventional mortgage, an FHA mortgage, or a VA home loan.  Applying for and securing a reverse mortgage is a process that involves different steps.  Know the whole story before you begin.

2. Do you need the money?  A reverse mortgage provides you with a steady stream of income derived from your home equity.  But if you don't need this income, you're probably better off letting your equity continue to appreciate safely in your home.  Don't pursue a reverse mortgage unless you need a source of income.

3. Are you willing to pay an added expense?  Reverse mortgages, by their nature, require hefty closing costs and startup fees.  They don't come at the lowest mortgage rates.  Are you willing to sacrifice some of your equity toward this?  If so, then a reverse mortgage will benefit you in the long run.

4. What are your future plans?  If you've just retired and want to live off your home equity, a reverse mortgage might be a good fit.  But if you plan to stay alive for the next 30 years, your new source of income may run dry during your later years.  Be cautious with your home equity.  Don't spend it too soon.

If, after you've answered these questions, you feel that a reverse mortgage is a good fit for you, go for it!

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