Reverse Mortgage - Common Issues
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.
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.
Equity. The reverse mortgage equity loan is all about equity. Every payment the lender makes to you is in exchange for a slice of the equity in your property. Unlike your traditional home loan, the balance due on the loan goes up.
The number one question regarding reverse mortgages has to do with equity. Specifically, what happens if the equity is all used up before the borrower dies or the home is sold? Do you lose the home, get foreclosed on or what?
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.
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.
So, can you change your mind and go in a different direction? Yes. In doing so, however, you have to either sell your home to pay off the reverse mortgage or simply pay it off outright.
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 often touted as a great way to pull income from real estate. In truth, it is a very expensive method for doing this and there are better options. Make sure to speak with a financial advisor before going this direction.
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