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Reverse Mortgage Advantages and Disadvantages

April 14, 2012 | Comments: 0 | Views: 124

A reverse mortgage is a loan that uses your home's equity as collateral. Instead of borrowing money from a bank to purchase a home, you borrow money against the value of the home you already own. There are some advantages to using this type of loan, but there are also disadvantages that you should consider before deciding to borrow money in this fashion.

Advantages of Using a Reverse Mortgage

It is often difficult for elderly people to secure low-interest loans that they might need for health care, a source of income during retirement, or other situations. Many lenders simply do not want to give elderly people loans because they worry that the borrowers will not be able to repay it. After all, they don't always have a reliable source of income and they could pass away before the loan has been repaid. A reverse loan on a house, however, makes lenders feel more comfortable because they have a firm source of collateral that lowers risk significantly.

Disadvantages of Using a Reverse Mortgage

There are numerous disadvantages to using this type of loan. The biggest disadvantage is that you could lose your home. If you find that you cannot make payments at some point in the future, than the lender can take ownership of your property. Suddenly, the advantage of using your home as collateral turns into a big problem. There's also the possibility that your loan could exceed the value of your home. Reverse mortgages usually have fairly high interest rates. Over 30 years, compound interest can put your house "under water." When that happens, you owe more than your home is worth. Even if you sell your home, you could still owe more money.

Lenders can also put demands on the borrower that forces them to maintain the property. This isn't always easily for elderly people who might not have the strength, eyesight, or other abilities needed to maintain a home and surrounding property. If they don't have the ability to maintain the property, then the borrow has to hire someone else to do it. That means losing more money just to keep the loan in good standing.

Finally, your loved ones could lose their homes if you pass away. This is primarily a concern for sole owners (if your spouse or other relatives are not listed on the deed, then you are the sole owner). The lender could take possession of the house for debt repayment after you pass away. That leaves your loved ones out in the cold.

There are some advantages to using this funding source, but it is important to weight the advantages and disadvantages to make sure you know what you are getting into.

Tomorrow Finance compares home loan interest rates from best home loan lenders in Australia.

Source: EzineArticles
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