Reverse Mortgages - Are They Only For Suckers?

It sounds too good to be true- a home loan that you never need to pay back. No monthly repayments, nothing - for as long as you're alive or live in your home. Welcome to a reverse mortgage - it may sound incredible, but that's basically what a reverse mortgage is about.

Basically, reverse mortgages have been developed in recent years because of the "greying" of the population. People are living much longer lives, which means that many older people are barely surviving day to day, and yet are living in houses that over an extended period of time have risen enormously in value. It's a classic case of asset rich, cash poor.

The idea of a reverse mortgage is to give that elderly person a chance to use some of the equity in their home, and hopefully make life a little easier for them. It may give them the chance to perform much needed maintenance on their home, or perhaps buy a car or go on a holiday. The loan can be used to set up investments to help supplement their income.

As most older people are no longer working, they were previously locked out of the mortgage market because they had little income. A reverse mortgage, however, doesn't require any monthly payments, and so the borrower's level of income is unimportant. Basically, instead of the borrower making a payment each month, the interest is added to the outstanding balance of the loan. Then, when the borrower dies or sells the house, the loan is paid out. Simple, and very effective.

You can draw the money from your reverse mortgage in a couple of different ways. You can draw down all the funds immediately, and so have a large lump of cash to invest or spend. Or, you can receive a monthly cash advance on the loan. So, for example, if you had a reverse mortgage of $50,000, you could draw down $1,000 a month for 50 months. That sort of cashflow could certainly make a difference to the lives of many elderly people.

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