There seems to be a lot of confusion about reverse mortgages; this is something I’ve experienced first-hand from members of my family, as well as my interaction with clients.

The first question that virtually everyone asks is, “What is a reverse mortgage?” And, the answer is: It’s nothing more than a loan against the equity in your home, just like any other mortgage, home equity loan or 2nd mortgage. The difference, however, between a “traditional” mortgage loan and a reverse mortgage loan, is that the homeowner doesn’t make payments to repay a reverse mortgage.

The amount of money a homeowner can get from a reverse mortgage depends several factors, including 1) the value of the home, 2) how much equity they have in the home, 3) the age of the borrower, as well as 4) current interest rates and related fees.

As for how the borrower can receive their funds, they can elect to take them in monthly installments, a single lump sum payment, or take the funds as they need or want them, like using a credit card.

Now, upon learning that there aren’t any mortgage payments, most people ask, “How do I repay the reverse mortgage?” Well, there are only a few events that trigger the repayment of a reverse mortgage, 1) the sale of the home, and 2) the death of the borrower/homeowner. In either case, the amount of the reverse mortgage debt is paid from the proceeds of the sale of the home. And, if the value of the home is greater than the amount of debt, either the owner (in the case of a sale) or the heirs receive the money received above the amount of the debt, just like the sale of any other home with a mortgage debt.

This naturally begs the question, “What if the value of my house is less than what I owe?” Well, if you go back to the third paragraph of this post and look at number 4, it refers to current interest rates and RELATED FEES. And, one of those ‘related fees” paid by every reverse mortgage borrower is for something called “mortgage insurance.” This insurance shields the lender against loss due to a decline in the value of the property, or if the accrued interest exceeds the value of the property (which can occur for a loan that is in place for many years).

So, what’s so bad about a reverse mortgage?

The most important, and the least advertised fact about reverse mortgages is, they have extremely high fees associated with them. In addition to having to pay mortgage insurance to protect the lender, the borrower will also pay huge “processing” fees; these fees are commonly double the amount of the fees charged for traditional mortgages that are paid back monthly. These fees are paid up front as part of the original closing fees.

But, how are the fees paid?

The mortgage related fees are added to the amount borrowed. And, to add insult to injury, the borrower is paying interest on BOTH the amount borrowed AND the up front fees.

As for whether or not a reverse mortgage is a good or bad thing for you depends upon your specific situation; there is no cookie cutter answer to that question.

My best advice to anyone thinking about getting a reverse mortgage, is to sit down and discuss your specific situation and goals with a competent real estate professional who has experience with reverse mortgages before venturing into a reverse mortgage.

You may also want to read a pretty good article I recently came across that discusses the benefits and liabilities of reverse mortgages. You can read this article on the web at:
http://www.bankrate.com/brm/news/mortgages/20070104_reverse_mortgage_a1.asp?caret=4l

I hope this information has answered your questions about reverse mortgages. However, if you have additional questions, or would like to me to consult with you to discuss your specific situation, please contact me. There’s no cost and no obligation of any kind.

This entry was posted on Tuesday, October 13th, 2009 at 10:26 pm and is filed under Mortgage Related. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.