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Reverse Mortgage - Common Issues

Wednesday, April 16th, 2008 Subscribe To Our Feed

A red hot loan package that is getting a lot of attention these days is the reverse mortgage. Common question arise regarding the loan, so let’s take a closer look.

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.

The reverse mortgage is based on the equity in your home. Every time the lender makes a payment to you, it gets a bit of your equity. This equity is held as debt like in a traditional mortgage and interest is charged on the amount.

The first issue that arises with this program is the issue of finite equity. Practically speaking, what happens if you outlive the equity in your home? Does the lender take over the home and kick you to the curb?

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.

At some point in time, you might realize a reverse mortgage is not for you. Can you get out of it? Generally, you can so long as you pay off the mortgage debt. Make sure to read the loan documents for language on this issue.

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.

In some cases, the reverse mortgage makes sense. In others, it does not. The only way to make a determination is to discuss the details with a financial professional.

Barry Waxler is a financial advisor with UFCAmerica.com.

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