If you watch television at all, you’re almost bound to have seen either former senator Fred Thompson or actor Henry Winkler, “The Fonz” from the popular sit-com “Happy Days,” touting the advantages of a reverse mortgage for senior citizens. Both ads make a reverse mortgage sound like an easy way to turn the equity in your home into ready cash that can be used for anything. The ads also imply that the borrower never has to pay back the money loaned. On the surface, it sounds like a great way for seniors to tap into the equity they have in their homes so they can live more comfortably.
Well, it’s not quite that simple. Nobody is going to lend you money – because that’s what a reverse mortgage really is, a loan to the homeowner based on the equity the owner has in the home – without expecting it to be repaid, with fees and interest. Always remember the old saying, “If something sounds too good to be true, it probably is.”
Here are some basics on how a reverse mortgage works. The borrower has to be at least 62 years old and must occupy a home as their principal residence. The size of the loan someone may qualify for depends on several factors: the age of the borrower; the extent of ownership, (equity), the borrower has in the home, the appraised value of the home, less the projected cost of any repairs that need to made for health or safety reasons; the interest rate of the loan, which is periodically added to the amount of the loan; and whether the loan is paid to the borrower as a line of credit, cash payments each month to the borrower, a lump sum payment all at once, or a combination of the foregoing, selected by the borrower. Needless to say, the interests rates charged are going to vary depending on the method selected. The highest interest rate, incidentally, goes with the lump sum payment.