Is Bankruptcy Better Than A Reverse Mortgage?

July 28, 2009 | Filed Under Money

by Josh Ramos

You should always think carefully before making a financial decision, and this is certainly true when it comes to decisions like bankruptcy. However, bankruptcy is not the only decision that has long-term effects. What about something like a reverse mortgage?

Reverse mortgages are loans, but they are specific types of loans. They’re specifically meant for senior citizens (or those who are 62 years or older) and have significant equity in their home.

Let’s say you own a $200,000 home, and you own it free and clear (which means you don’t owe the bank anything anymore). You can borrow a certain percentage of the equity in your home, and that amount will be paid to you at a specified time such as on a monthly basis. You won’t have to make any mortgage payments, and nothing has to be repaid until the senior citizens move or die. (You don’t necessarily have to own the home free and clear, as some lenders will simply use whatever equity you may have.)

If you never repay the loan, the lender will end up with a house. This may not matter to you if you don’t intend on leaving your children or grandchildren with inheritance or if you have no surviving relatives. Otherwise, you should think carefully about this because your heirs could end up with nothing. The other option is to repay the loan before you pass on. Depending on the policy of the lender, your heirs might have the option of paying back the amount you borrow in order to keep the house themselves.

Otherwise, you need to be very careful about this option. If you want to bequeath the house to someone you love, then that loan has to be repaid at some point. Also, you need to make sure that you’re dealing with a good lender and not someone who pushes or tricks the elderly into making decisions that are not in their best interest. A reverse mortgage may also change how the government views your benefits like Social Security and Medicaid. The rules change from time to time, so you should look into this as well.

If you want to keep your home but have a large amount of debt, bankruptcy may be the better option. We’re not saying this is always the best option, but the point is that you can wipe out debt while protecting your home (depending on the homestead exemption in your state and how much debt you owe). You shouldn’t be so quick to put up your house as collateral in order to pay unsecured debt like credit cards and other financial obligations.

About the Author:

Don’t let the fear of your debt take over your life. Get the facts about bankruptcy and learn how to get control of your debt. To learn more about life after bankruptcy visit us at http://personalbankruptcyquestions.org

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