Reverse mortgage loan is awarded to older people who have attained age 62 years and above who own a home. The homeowners are allowed to change part of their wealth into cash. The loan was established to help retired people with little or no income use long acquired wealth to meet necessary basic expenses including health care. Usually, there is no monthly loan repayments; however, borrowers are supposed to pay taxes and insurance on the property where they live ( Merrill, Finkel & Kutty, 2014 ).
Other reverse mortgage loan merits include flexibility since it is utilized in different ways according to ones' needs or purpose. There exists low default risk for reasons of non-payment. Further, money received from investment is tax-free when collected in lump sum. There exists flexible payment options since one can win money in lump sum, credit line or annuity. According to Nakajima and Telyukova (2017) , the reverse mortgage loan gives a person guaranteed residence to live and helps the borrower retain home ownership once the loan is secured. The mortgage scheme is insured. In the event of default, borrower would still receive payments.
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The reverse mortgage loan has shortcomings including high fees that attract accumulated interest since the amount due increases over time. The mortgage obtained has a maximum limit; even when the house value is high, the lender cannot bypass the determined amount. The credit restrains spouses from migrating. The lender may foreclose in the event the spouses stops using the home as the primary residence. Further, Nakajima and Telyukova (2017) noted that the borrower can only seek the reverse mortgage when experiencing financial challenges after retirement age, and want a regular flow of income for upkeep. The heirs only receive profits on equity if any after paying the mortgage balance in full. The reverse mortgage is, thus, suitable for the aged couple as long as they can afford to pay insurance premiums and property taxes.
References
Merrill, S. R., Finkel, M., & Kutty, N. K. (2014). Potential beneficiaries from reverse mortgage products for elderly homeowners: An analysis of American housing survey data. Real Estate Economics , 22 (2), 257-299.
Nakajima, M., & Telyukova, I. A. (2017). Reverse mortgage loans: A quantitative analysis. The Journal of Finance , 72 (2), 911-950.
