Often times, when people talk about reverse mortgages, the reaction is like offering someone toxic waste.
In the past this reaction had some validity. But now the reasons for the reverse mortgage hatred have been weakened or eliminated entirely, and the FHA and HUD are even regulating many of these offerings.
A reverse mortgage allows a homeowner over the age of 62 to borrow against the equity in their home. The reverse mortgage becomes due when the borrower moves out or dies.
Nathan Johnson, reverse mortgage loan specialist (www.todays reversemortgage.com) warns that if the lender is put on the title as co-owner, “this is not today’s reverse mortgage,” and advises you to find another reverse mortgage.
Instead of requiring payments like a traditional mortgage, a reverse mortgage does not require payments. The interest on the loan is only added to the loan amount. How much can be borrowed on a reverse mortgage depends on the age of one of the borrowers and the appraised value of the home. The borrower – or at least one of the borrowers if it is a couple – must be at least 62 years old. The older the borrower, the higher the percentage of appraised value the reverse mortgage can offer. For example, a 62 year old may be eligible for 45% of the appraised value of a home, while an 82 year old may be eligible for up to 65%. The advance is also calculated after fees and closing costs.
The interest rate can be variable or fixed, with fixed interest rates currently in the range of 3% to 5%. A reverse mortgage is not like a home equity line of credit, which is often in addition to a home mortgage. And most lenders don’t offer a home loan for a home with a reverse mortgage.
Reverse mortgages are usually intended for a primary residence, not a vacation home or rental property. The lender will likely require the borrower to certify that the home is a primary residence at the time of the mortgage loan and may require periodic confirmation that it is still the primary residence. If the borrower moves and there is still equity in the house, it goes to the borrower. If not, the mortgage company will not track the borrower – or the borrower’s estate – for the difference.
There are a few main types of reverse mortgages. You give the proceeds once. The other offers a line of credit. And some reserve mortgages offer some of both. The reserve mortgage can pay off an existing mortgage or provide cash flow or investment funds.
Next week we’ll be looking at who could benefit from a reverse mortgage and what types of those loans will best suit their needs.
Linda Leitz is a certified financial planner. She can be reached at [email protected].