Reverse
mortgages used to be considered last-resort options for senior in their 70s
and 80s who were in need of cash. Now, baby boomers are looking to
reverse mortgages to increase their savings and pay off debt such as credit
cards. New aspects of reverse mortgages, such as fixed-rate lump sum
loans, are definitely contributing to the appeal for boomers. However,
these new aspects present risks to borrowers, as reverse mortgages could
consume home equity, ultimately leaving borrowers short-changed later in
life. Analysts recommend that borrowers think long-term before taking out
a reverse mortgage and aren’t just taking out the mortgage to solve short-term
problems.
Almost all reverse mortgages are insured by the FHA. The Home Equity
Conversion Mortgage (HECM) enables the government to pay the lender if the house is
sold for a lesser amount than the loan’s balance. When the loan is due,
the homeowner won’t owe more than the home’s worth and will receive any
leftover equity.
These large payouts are clearly appealing to younger
homeowners. In 1999, only six percent of borrowers were ages 62 to 64,
compared to twenty-one percent of borrowers being 62 to 64 in 2010. If
younger borrowers continue to take out lump-sum loans, there could be no home
equity left in 10 or 20 years due to the compounding of interest. What
does this mean?
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