The beauty of a reverse mortgage is that it allows a senior citizen, having worked hard all of their life and invested wisely in their home, the flexibility to access funds to supplement their income, afford unexpected expenses, or have access to a line-of-credit for emergency needs.
Since the lender is, for all intent and purposes, buying back your home over a specific period of time, there are advantages and disadvantages of reverse mortgages they need to be thoroughly evaluated before signing on the dotted line.
To qualify for a reverse mortgage, the borrower must be at least 62 years of age. The older the buyer and the higher the FHA-appraised value of the home, the higher the amount of funds available. If a senior citizen simply wants to set up and have ready access to a line-of-credit for emergency purposes, as long as they are 62 years of age or older and remain in the home, interest on a reverse mortgage does not begin accumulating until funds are withdrawn.
However, note that fees associated with a reverse mortgage are typically higher (about 5% of the homes value) than Home Equity Loans or Home Equity Lines of Credit (HELOC). In the first case, the reverse mortgage loan does not become payable until the borrower passes away or the home is sold. In the latter, monthly payments are made until the reverse mortgage is satisfied, however, the fees are less.
Reverse mortgages would be an alternative to an elderly homeowner on a limited income who desires to stay in their home, or sell and secure a smaller home. Perhaps there are home improvements to be done ― such as repairing the roof or replacing the air conditioning system. A senior citizen on a fixed income might not be able to afford these items outright or even with a loan. This is where a reverse mortgage might come in handy and allow them to stay in their home and obtain the needed cash for repairs or upgrades.
In another instance, a retired couple with no offspring and hence, no heirs to will their estate to, may elect to utilize the cash afforded by a reverse mortgage to partake of opportunities they did not have the finances or time for, while they were working full time. Once the borrower(s) leave the home, the reverse mortgage loan becomes due. Only after the reverse mortgage loan is satisfied, are the remaining funds from the sale of the home available to your estate.