Reverse mortgage is a finance loan for senior citizens (defined as 62 years old in US federal law). This is one of few ways for old people who are experiencing financial difficulties to afford a decent living.
Borrowers use their house as a source of tax-free income. There are many ways in which they can receive their payment—it can be given in total payment, monthly compensation, and line of credit arrangement.
While in conventional mortgage, borrowers are required to make a monthly payment to the lender, reverse mortgage requires no payment until the borrowers die, leave their houses, or their property has been sold.
In the US, a house can only be reverse mortgaged once, but in other countries, a property can be loaned as many times as long as the loan balance has been paid.
Borrowers will receive a mortgage payment depending on their age and their life expectancy. The older the borrower is, the more eligible he/she becomes for this mortgage. The payment awarded to people may also depend on their house of residence.
While it seems that reverse mortgage offers many financial benefits especially for low-income retired people, it also has its downside. This is the reason why before anyone can engage in this kind of loan, they are first required to attend a comprehensive counseling since this step is seen as the only last resort for old people who need financial assistance.
One of the disadvantages of reverse mortgage is that the inheritance of the borrower’s family will be reduced since the lender will have possession of the house as soon as the borrower dies or leave his/her residence (unless the family is willing to pay the lender with their own money). But in some cases, this arrangement is advantageous for borrowers to live their lives without financial difficulties since most of aged people are already retired from their work and have no other source of income.
Another downside for reversed mortgage is that it comes with a higher interest rate compared to other kinds of loan. Borrowers are required to pay servicing fees and insurance premiums which serve as protection requirements for lenders especially in cases in which the loan awarded to the borrower has far exceeded the total value of his/her property. All these miscellaneous costs are included in the total loan balance of the borrower and are subjected to interest (which often comes in higher interest rate).
But still, in spite of some risky ramifications of reverse mortgage, this can help retired people to pay for their hospital and medical bills. The payment for this loan can also serve as a way to pay for their basic needs and to maintain their houses.
According to a financial expert, before someone decides to have a reverse mortgage, consider first other options that can produce income such as home equity line of credit since this requires a much lesser service cost compared to reverse mortgage which usually comes with a very high interest rate.