By Ryan McNeill, Attorney
Although most buyers understand how a traditional fixed or variable rate loan works, there is a lot of misinformation out there for borrowers interested in a reverse mortgage.
What is a reverse mortgage?
A reverse mortgage is a home loan available for borrowers 62 years old or older that allows for a conversion of equity in the home into cash. A reverse mortgage is different from a standard equity line of credit in that it is available regardless of income and there are no monthly payments. The most important difference between a traditional loan and a reverse mortgage are the terms of repayment: no payment is required to the bank until you die, you leave your home for more than 12 consecutive months, or you sell your home.
Is a reverse mortgage right for me?
The main drawback of a reverse mortgage is that the fees and closing costs associated with a reverse mortgage are generally much higher than that of a traditional loan. Although these costs can be added to the principal balance of the loan, this will make the loan much more expensive over a long period of time than a traditional mortgage. There are options for lower cost reverse mortgages in certain situations, however. An ideal situation for a reverse mortgage would be an individual or couple over age 70 with the home paid off and who may be having a hard time meeting monthly expenses on a fixed income. A traditional mortgage would not be as beneficial in this situation because it would simply create an additional monthly payment and create the possibility for foreclosure. A reverse mortgage would allow the person to remain at home, receiving either a lump sum or a monthly check from the equity of their home. This additional income would allow that person to continue to live in the home and meet monthly expenses without the fear of foreclosure. This is also ideal when there is no strong desire to preserve the homeplace for children or other heirs.
A reverse mortgage payment to the homeowner can be in the form of a monthly payment, a lump sum, or can be drawn out at will. Both variable and fixed rate reverse mortgages are available. The amount loaned is determined by a calculation involving the home value and the age of the homeowner, so an older borrower will be able to withdraw more money than a younger borrower. The homeowner is required to keep the house in good repair throughout the reverse mortgage so that the home value does not decline greatly.
How can I get a reverse mortgage?
In order for a person to receive a reverse mortgage it is required that they meet with a HUD approved counselor to discuss the benefits and drawbacks of a reverse mortgage and to make sure that such an option is in their best interest. If you want more information about reverse mortgages I recommend reviewing the information on the AARP website, which covers a variety of topics about reverse mortgages, including reverse mortgage alternatives. You should also consult with an attorney who has handled reverse mortgage closings in the past because they are different than traditional mortgage closings.