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Reverse Mortgage - Common Issues

The reverse mortgage is getting a lot of play these days in the media, but what is it exactly? Let's take a closer look at it and some of the issues that arise.

The reverse mortgage is a form of negative amortization, but with a favorable side effect. While you make payments to a lender with a traditional home loan, the lender makes payments to you with a reverse loan.

As payments are made to you, more and more of the equity in your home is converted into debt. That debt grows at an interest rate that is typically one to two points higher than a normal mortgage or refinance.

The number one question regarding reverse mortgages has to do with equity. Specifically, what happens if the equity is all used up before the borrower dies or the home is sold? Do you lose the home, get foreclosed on or what?

This is exactly what happened when these loans were first offered. This unsavory result did not stand. The federal government got involved. In most current situations, you are allowed to remain in the home, but payments to you stop.

If you are going to be giving away equity, what size of payments can you expect? There is no simple answer. Factors such as the amount of the reverse mortgage, your age, costs and so on all go into the calculation of the payment amount.

Finally, the biggest factor is the particular plan you choose. You will have a choice of different options that produce different payments and so on. The situation is similar to the one in which you decide upon a mortgage for a home you buy.

What happens if you realize you should have gone in a different direction? Can you refinance your home to get out of the loan? Yes, so long as you pay off the amount due on the reverse mortgage. Make sure to check the fine print for prepayment penalties.

Real estate is beautiful because it appreciates most of the time. After getting a reverse mortgage, can you still tap this appreciation? The answer is usually yes, but you may have to refinance the property to do so.

What happens when I die? The reverse mortgage is handled no different than any of your other assets. It becomes due. This means your heirs must either pay it off or sell the property. If they sell the property, the reverse mortgage balance is paid off.

The reverse mortgage is often touted as a great way to pull income from real estate. In truth, it is a very expensive method for doing this and there are better options. Make sure to speak with a financial advisor before going this direction.