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How to Invest and Save Money

How to Invest and Save Money

Britt Erica Tunick is an award winning financial journalist who has spent the past 17 years writing about virtually every aspect of finance. She has mastered the art of boiling down complicated financial topics for readers to understand.

Reverse Mortgages - What They Are and How They Work

Reverse Mortgages - What They Are and How They Work

By Britt Erica Tunick

Unless you are someone who never watches TV, you have probably heard about reverse mortgages on one of the countless commercials touting them as a good way for retirees to supplement their retirement savings or pay off debt. But as appealing as that may sound, there are a few things you should know before running out to apply for a reverse mortgage.

Just like it sounds, a reverse mortgage is essentially a loan that a lender makes to an individual or a couple who are 62 years or older based on the equity that they have built up in their home. Lenders issue reverse mortgages based on the age of the borrower (or the age of the youngest borrower in a couple) and the value of their home. As part of these loans borrowers must agree to continue living in and maintaining their home as long as the mortgage exists. In exchange, they can receive a steady stream of payments for the amount they are looking to borrow against their home, or a lump sum payout.

As with traditional mortgages, reverse mortgages involve closing costs and require that a borrower maintains homeowner’s insurance. One major difference, however, is that instead of slowly paying off what you owe the bank, the interest that you owe on the money borrowed through a reverse mortgage will continue to accrue –until the time that your home is sold and the debt is repaid in full. Many reverse mortgages are also variable rate loans, making it difficult for borrowers to determine what they –or their children, will ultimately owe on such loans.

While there are situations where a reverse mortgage can be an attractive option, they are definitely not for everyone. A reverse mortgage can be an attractive option for a single individual who has a lot of equity built up in their home but not much money saved to live off of, and who doesn’t have any children or family they are hoping to leave their estate to. For people with family who are hoping to leave something to their children and grandchildren once they pass away, reverse mortgages can eat up a significant amount of the equity saved up in a home –which is often the most valuable possession people have.

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