Reverse Mortgages: Risky Credit Choices and Their Consequences

Reverse mortgages – many people have not heard this term before but now with the apparent credit crisis in our country finance companies and banks are looking for other ways to tap into resources that would otherwise be inaccessible to them. For those older Americans feeling the squeeze in regards to their own credit availability and the need to pay down their debts, a reverse mortgage may seem like a pie in the sky solution. Unfortunately, a reverse mortgage is extremely risky and can have unforeseen consequences for the entire family who resides in the home in question.

Simply speaking, a reverse mortgage is a type of mortgage loan that is generally available to Americans who are over 62 years of age and who have equity in their home. The bank will lend you money based on the amount of equity you have in your home without you having to make payments so long as you reside in that home. This seems like a good deal right? There’s a catch — the loans accrue interest which is compounded and every time you take out more money in this manner your home loses equity and you lose more of your home ownership. With housing values steadily sinking across the nation, it’s very easy for the unwary to end up owing more due to a reverse mortgage than their home is actually worth.

This increased debt to income ratio can make it virtually impossible to get any other type of loan regardless of your payment history and other areas. Additionally, the interest continues to be compounded and as many individuals who take out reverse mortgages have limited or no income paying down these loans becomes impossible after only a short amount of time has passed.

The lack of required payments, rather than being a benefit turned out to be detrimental. The loan must be repaid, and in many cases ownership of the home will revert to the bank after the homeowner has died if these payments are not made in a timely fashion. This can mean that a surviving spouse or other dependents will be forced to make high mortgage payments or give the house up for foreclosure.

So when can a reverse mortgage actually be beneficial? It definitely depends on the circumstances. An older individual who has adequate income can use are averse to mortgage to improve his or her credit score if they are careful. Making timely payments and ensuring that the bank reports these payments can improve your credit history. These payments, although not required, will reflect a steadily decreasing balance on your debt which looks good to other potential creditors. Having a responsible repayment plan that you are able to stick to faithfully can help you to avoid the pitfalls of a reverse mortgage and take advantage of the flexible payment arrangements it affords. Otherwise, this type of mortgage may prove to be too risky to your overall credit health.