Thursday, August 2, 2007

Reverse Mortgages -- Your Questions Answered

What does “Reverse Mortgage” mean anyway?

Traditionally, you borrow against the majority of your home’s value and as you make your payment each month you build equity. With a reverse mortgage, the opposite is true. Instead of using payments to gain equity, you use your equity to gain income. Throughout the life of the loan, the balance increases while the equity decreases.

I heard your house has to be worth a bazillion dollars to qualify?

No, to qualify you must be at least 62 years young and have at least 50% equity in the home you occupy. That’s it.

Is it true that “they” can take my house away?

No. When you die or live elsewhere for 365 consecutive days, the lender will expect to be paid. Your heirs have the choice of paying off the loan by selling the house or they can refinance if they prefer to keep it. Banks are in the money business, not the real estate business – they really don’t want your house.

But what if I end up owing more than it’s worth?

It’s impossible. You can never owe more than the house is worth at the time you take out the loan, let alone more than it’s worth after it's had ten years to appreciate in value. This is what's known as a “non-recourse” loan, meaning that it can never leave your heirs in debt.

How much money can I get?

The amount is calculated based on your age (and your significant other’s age if you own a home jointly), the value of your home, current interest rates and, in some cases, where you live. As a general rule, the older you are and the more equity you have in your home, the more money you’ll get. This handy little calculator will give you a ballpark idea (scroll down to "loan calculator").

I heard it’s outrageously expensive?

It’s expensive, but there are no out-of-pocket expenses for the homeowner.

How do I get my money?

There are usually three options. You can receive a lump sum payment if you need a significant amount of cash, like, today. Otherwise the bank will send you a predetermined sum of money each month. Alternatively you can set up an equity line of credit so that you take what money you need as you need it.

Great! So what’s the procedure?

You have to participate in a counseling session (which can now be done via telephone) with an independent third party, sign some applications and disclosure forms with the lender, and wait for your house to be appraised. You don’t have to “qualify” for the loan in the traditional sense of the word. A credit report is pulled to verify liens and judgments that will need to be paid from the proceeds of the loan, but your credit history, income or asset situation cannot disqualify you from the program.

But do you think I’m a jerk if I spend my kids’ inheritance?

No. You’ve worked hard – retire comfortably.

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Anonymous said...

but if a widowed man wants to do a reverse mortgage for him and his new spouse just to take care of her after he passes away (terminally ill) when she already has 5 children to take care of her, leaving the children of the father without an inheritance, I think that is a great misjudgement!

Richard said...

Awesome post,
If you have a home that’s paid off – or almost paid off – a reverse mortgage can help you live better by providing a steady stream of dependable income. This type of mortgage is called a reverse mortgage because instead of you paying the lender a certain amount per month for a certain number of years, the lender pays you. These payments are cash advances against the value of your home.


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