We will soon look at some of the good reasons why this mortgage scheme may be right some couples or individuals, but first of all, what exactly are reverse mortgages?
This type of mortgage plan allows you to receive money from the lending institution, a little like a loan. In the case of this reverse scheme you use the home you already own as capital and the payment guarantee. Similar to your mortgage the first time around when the lender initially owned your house and you gave them money each month in order that you would finally own your home - just this time it is kind of in reverse, hence the name of this kind of mortgage.
The ability to raise some capital when you are no longer working is one of the reasons that it appeals to many people. Having worked a whole lifetime, a lot of folk find they have most of their capital locked up in their home, but do not have the money they need to do some essential things. It is quite sensible to think about releasing some of that capital by using your home as the guarantee.
One of the first basic things to bear in mind is that you are using your home as the loan security. If you take out a reverse plan you are in effect slowly selling part of your home. If you had been planning to leave the property as an inheritance to your offspring, remember that this kind of reverse lending that uses the home as capital is eating into the value of the home. If you were to die owing money on the loan then any profit made from the sale of your house would need to first pay back the mortgage. Some people will not even think about a reverse plan for this reason. However there is no reason that the loan will eat up a large portion of the profit from your home, and in any case it is your home!
There are three main types of reverse mortgages on offer: 1. the single-purpose reverse mortgage-plan; 2. the Home Equity Conversion Mortgages (HECMs); the proprietary reverse mortgage-plan.
The first type, the single purpose, is offered by local government agencies or the state. They are government run and hence not-for-profit, so the fees tend to be low. The down side is that they can only be used for the specified purpose (which could be a new roof, for instance). The other problem is that your state might not offer them at all - they are not universally offered.
The second type, the HECMs are backed by the US Department of Housing and Urban Development. They tend to have higher fees than other types so if you plan to take one out then sell your home they might not be the smartest choice. If you stay in your home however they are very flexible and need no special medical certificate or specific income levels.
The third type are the proprietary reverse mortgages - these are straightforward private loans, and probably the most similar to your initial home-buying mortgage. In terms of costs and so on they are similar to HECMs, but you can shop around for the best deal.
A typical home owner who generally takes out a reverse mortgage is older - usually beyond retirement age - and owns a reasonably valuable house but is short of ready money. The money released by the mortgage in reverse is typically used for home improvements or simply to live in a better style. All in all it can be an intelligent way of making use of what many people find is their greatest asset - their home.