Introduction to the Reverse Mortgage

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The finance industry is often coming up with new products. The latest, greatest thing is the reverse mortgage.

The reverse mortgage is essentially a proposed solution to the current nest egg problem we are seeing in the United States. What is this problem? Well, we have a bulge in the demographics for people 50 or older and they are sitting on large amounts of money. The problem is that money is locked up in their homes.

You, me and everyone under the sun has always been told investing in real estate is the way to go. Between paying off the mortgage and the property appreciating in value, you can't go wrong. While this is generally true, most homeowners are now finding themselves sitting on a valuable asset that is slightly illiquid. Specifically, you can't pay for a cruise to Alaska with your bathroom fixtures!

This lack of liquidity is a common perceived problem. When such a problem pops up, the finance industry rushes to come out with a new product. The reverse mortgage is one. As is often the case with new "solution" products in finance, it looks good at first blush. In truth, it is a very poor solution for getting liquidity out of your home. You can read our "Disadvantages of Reverse Mortgages" article here when you are ready.

As the name suggest, the bank makes payments to you in exchange for equity in your home with a reverse mortgage. You must be over 62 years of age to qualify for the program. If you meet this threshold, you can qualify for to have part of the equity in your home converted into bank property in exchange for monthly or a lump sum payment. The maximum equity you can convert is 50 percent or $368,000, whichever is less. Lenders will typically charge between $10,000 and $30,000 to get the mortgage started. You will also pay a higher interest rate on the amount borrow when compared to traditional loans, often two percent higher.

Ultimately, the reverse mortgage is not a great option for people looking to live off the equity in their homes. The costs associated with getting into the loan are nearly scary and the terms dictated by lenders are often dubious. If you are considering entering into a reverse mortgage agreement, you should speak with a qualified financial professional before doing so. Remember, the salesperson trying to sell you the reverse mortgage does not have your best interest at heart!

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