Posted by Joe Bartolotta, a Florida Upfront Mortgage Broker on September 25th, 2007
With today's cost of living increasing, a Reverse Mortgage might be a solution to some of the "baby boomers" who are not retired or retiring in the future. Most people do not understand how Reverse Mortgages work, in the article, I will explain the advantages and disadvantages of the 5 ways to receive payment from a Reverse Mortgage.
Before I begin, let me first say that a Reverse Mortgage is not for everyone, the Reverse Mortgage is designed for people within certain circumstances. As each client has a different set of circumstances, please feel free to contact me to talk in further detail about your situation and if a Reverse Mortgage is right for you.
Most lending institutions are encouraging senior citizens to look into getting a Reverse Mortgage. I feel that a Reverse Mortgage is great for the right people at the right time. Is it for everyone, no, but there isn't a loan that fits everyone all the time.
I'd like to educate the consumer on both the advantages and disadvantages of the Reverse Mortgages payment options. Let me explain the options of receiving Reverse Mortgage payments first. There are currently 5 options available to the person receiving the payments of the Reverse Mortgage. The options are:
- Line of Credit - You access funds at your discretion
- Term - You receive fixed monthly payments for a set period of time.
- Tenure - You receive fixed monthly payments for as long as you live in the home.
- Modified Term - Fixed monthly payments for a set period of time, plus access to line of credit.
- Modified Tenure - Fixed monthly payments for as long as you live in the home, plus access to line of credit.
Below are the pros and cons to the above mentioned payment options.
Line of credit -Pro - 1) Flexibility- You can access funds as needed. 2) Growth feature-The unused balance grows. This does NOT mean you are earning interest. The growth factor takes into consideration that your home has appreciated in value over the past 12 months and that you are one year older.
Line of credit - Con - 1) The funds in the line of credit can be exhausted. If that happens, one option may be to refinance your reverse mortgage to gain access to additional funds. 2) To access funds, you must submit a written request to the loan servicer managing your account.
Term - You receive fixed monthly payments for a set period of time.
Pro - 1) Funds can be automatically deposited into your bank account. 2) You receive larger monthly advances compared to the Tenure payment option.
Con -1) The amount of funds you receive each month is fixed, so if you need additional funds, you will have to request a payment plan change. 2) Monthly advances are not indexed for inflation.
Tenure - You receive fixed monthly payments for as long as you live in the home.
Pro - 1) The monthly advances continue for as long as you live in your home, even if the total amount you receive exceeds the value of your home. Despite this, you will never owe more than what the home is worth.
Con - 1) The amount of funds you receive each month is fixed, so if you need additional funds, you will have to request a payment plan change. 2) Monthly advances are not indexed for inflation.
Modified Term - Fixed monthly payments for a set period of time, plus access to line of credit.
Pro -1) Provides two sources of available funds. 2) Combines Term and Line of Credit Advantages
Con -1) You receive smaller monthly payments because a portion of your equity has been set aside in the line of credit.
Modified Tenure - Fixed monthly payments for as long as you live in the home, plus access to line of credit.
Pro -1) Provides two sources of available funds. 2) Combines Tenure and Line of Credit Advantages
Con -1) You receive smaller monthly payments because a portion of your equity has been set aside in the line of credit.
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