Understanding the Reverse Equity Mortgage

There is little dispute that real estate has become a major savings mechanism for baby boomers. As they look to retire, strategies for turning the illiquid real estate investment into cash are coming to the forefront. The reverse equity mortgage is one such strategy.

The reverse equity mortgage comes in a wide variety of formats. All of them, however, share a basic format. At their heart, these mortgages make a payment to the homeowner in exchange for an interest in the equity of the home. The payments can be made monthly, quarterly, annually or in one lump sum. Every plan is different.

Regardless of how the payments are made, they are credited against the equity of the home as a loan. The amount of each payment is added to the loan debt and reduced from the equity in the property. The loan debt also grows at a specified interest rate. Additional costs, sometimes hefty ones, are also charged at the origination of the loan.

So, who is a candidate for the reverse equity mortgage? The prime candidates are individuals over 61 who want to live in their homes instead of selling them. The loan is marketed as a best of both worlds scenario, but retiries must make sure they dont run into a situation where they eventually use up the equity and are struck.

There are some serious drawbacks to a reverse mortgage. The first is you have to have some significant equity in the home to even be a candidate for the loan. Second, you tie up the home and it can be difficult to pass it off to a child as an inheritance. Third, the costs and interest rates associated with the loan can be very high.

Ultimately, the decision to go with a reverse equity mortgage is one that should be made very carefully. While it provides convenience, it is often considered a very expensive loan when compared to other financial options available on the market.

Get more information on reverse mortgages at UFCAmerica.com

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