Thursday, June 28, 2007

Reverse Mortgages

The pros and cons of reverse mortgages. What is a reverse mortgage? It is a loan available to home owners ages 62 and up, that taps into home equity to provide a monthly or lump sum payout. The main difference between a reverse mortgage and a regular home equity loan however is that the payment is deferred until the homeowner dies or otherwise leaves or sells the property. Like any mortgage however, you still pay interest. In other words, you purchase a home with a 30 year mortgage, pay interest for 30 years until it is paid off, then you do a reverse mortgage on it and pay interest again, and then the home goes to the bank.

Added on to the loan is mortgage insurance, because if at the time of sale when the bank is ready to offload the property that you've kindly paid twice the interest for, it may end up eating the difference if the property value is less than the value of the home. That could certainly happen with the housing collapse we are in now.

The biggest problem with these loans? Fees. You end up paying huge up-front costs compared to a traditional mortgage or equity loan in addition to closing costs. After that, you can draw out the equity and it plus interest is added to the principle of the loan. If you decide to leave early, the bank takes the house and sells it and gives you anything left over.

Another major problem is that bank can also take the house if the homeowner leaves for a period of time specified in the loan. With continuing health problems of the senior citizen with the loan, this could mean they could lose their house while in an extended, yet temporary stay at a hospital or nursing facility.

My opinion of this type of loan? Avoid it, and do everything you can before you end up in this situation to avoid it.

5 comments:

Anonymous said...

You obviously do not know what you are talking about for reverse mortgages. Suggest you get some facts before spreading incorrect information.

Beyond the Consumer said...

The information in the article is from the bankrate.com article. There is also more information here: http://www.reversemortgage.org/ as well as on other sites. Please let me know what information I have posted that is incorrect so I can correct or remove it.

Beyond the Consumer said...

Here's an even better source of information on reverse mortgages:

http://www.ftc.gov/bcp/conline/pubs/homes/rms.shtm

Mrs. Micah said...

Interesting. I thought such mortgages might work ok for people with terminal diseases who knew they were going to die in the next 5-7 years or less.

But if prolonged absences can put it at risk, then it's a horrible option for them. Good to know.

(My mom has a terminal illness, but my dad's still alive so I wasn't going to recommend it to them anyway.)

Anonymous said...

the bank does not take the home. if you move or die the home goes to the heirs who can sell it and pay off the loan or re-mortgage it if they want the home. it can be taken if they just leave.