In today’s economic climate more and more people who are getting near retirement age are asking about reverse mortgages.  It’s all about risk.

What is it?  First, if you are not familiar with a reverse mortgage, it is a loan that is available to U.S. citizens over the age of 62 in which the equity in their house is taken out as a loan in either a lump sum or monthly payments.  In essence you are borrowing against the value of the house.

The borrower’s requirement to repay the loan is put off until the owner either dies, the home is sold, or the owner moves into an elder care facility.  The borrower makes no payments on the loan, but there is interest added to the lien on the property every month.

How does it work?  When the borrower takes out a reverse mortgage there must be no other mortgages on the home.  The money can then be used to pay bills or buy a car, or pay for medical expenses.  It is made to sound very attractive in the ads on television and print.

What are the pitfalls?  There are dangers inherent with this type of loan, however.  First, the up-front costs are higher on a reverse mortgage.  Also, there is that interest that is added to the lien each month onto the home.  Those interest charges can be lower overall, but also, they can be variable, so that is a danger as well.

Obtaining a reverse mortgage could impact the eligibility for certain state and federal benefits including Medicaid.  Or, if there is a medical emergency that requires a liquidation of assets to cover nursing care costs, that would not be possible under a reverse mortgage.  If you are planning on leaving the home to heirs, then a reverse mortgage is not a good idea.

One who is considering this type of a loan must take into account the health status of the owners of the property, the reasons why they want a reverse mortgage, other sources of income, and how to wisely use the proceeds of the loan.

A reverse mortgage is not a clear-cut, easy solution for those who are interested.  In fact, it is much better to consider other alternatives before selecting a reverse mortgage.  A loan like this is only good for specific cases and is never something to jump into without investigating all of the costs, both hard and soft.