Reverse Mortgage - Common Issues
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by: BarryWaxller
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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.
As the name suggest, this is a loan wherein you receive payments from a lender instead of making them. The rest of the loan, however, is much different than your run of the mill mortgage.
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 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?
In the past, the ugly answer is that you would lose the home. Since senior citizens sitting on a curb did not go over well, the government stepped in. Most plans now allow you to stay in the home even if the equity is used up entirely.
Considering you are giving away a big chunk of your nest egg, you should get some sizeable payments, right? Well, maybe. There are a lot of factors involved. These include the dollar value of your equity, your age and so on.
While you should be concerned about how the payment is calculated, it is important to understand there is an easier way to determine it. Just ask to see examples. Multiple programs are available and they should show you the estimated payment amounts.
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.
Another issue that arises is appreciation. What happens if your home appreciates over time? Can you get at the new equity? In most cases, you can. Whether this has to occur through a refinance or a modification to the reverse mortgage is a case by case decision.
So what happens when you reach the end of the line? In such a situation, the home is handled just like one with a traditional home loan. Your heirs will either sell it or come up with the money to pay off the reverse mortgage.
The reverse mortgage is undoubtedly a new toy in the loan industry. That being said, it is very expensive. For a majority of people, it is a bad choice compared to other alternatives that are cheaper and produce more income.
About the Author
Barry Waxler is a financial advisor with UFCAmerica.com.
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