Bank Rate takes a look at reverse morgages and the tradeoffs that come along with the loans.
The loan can help borrowers generate cash flow, pay expenses, and achieve financial and estate planning objectives. Those goals are all “legitimate, if done wisely,” says Barbara Stucki, vice president of home equity initiatives at the National Council on Aging, a nonprofit advocacy and service organization for older Americans based in Washington, D.C.
On the minus side, these loans aren’t appropriate for every borrower or situation. Nor are they the free money they might appear to be. In fact, the upfront fees, mortgage insurance costs and deferred interest on a reverse mortgage can add up to a sizable sum.
Don’t borrow more than you need. Seniors may be tempted to take out a reverse mortgage for peace-of-mind purposes, but a lump sum in a bank account won’t generate enough income to offset the loan’s deferred interest expense, says Susanna Montezemolo, vice president of federal affairs at the Center for Responsible Lending in Washington, D.C.
“For the majority of people, it makes more sense to take out a minimum amount upfront, and then have access to a line of credit. They will owe less in interest over time,” she says.