September 2, 2006 - Reverse Mortgages
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Several have asked me recently about reverse mortgages. They're advertised on billboards, television, and radio ads. The baby boomers are reaching retirement and their planning for the future apparently wasn't sufficient so a new program to solve the problem is being touted. Reverse mortgages are the latest spin and everyone wants to know if they're a good deal. Thanks to Larry Cragun of Mortgages Undressed for clearing the muddy water for me. |
The most important thing to know about a reverse mortgage is that it is a negative amortization loan. Because monthly payments are not made each month, the amount that would normally be charged as interest is added to the principal balance. That causes the principal to increase each month. With most mortgages the debt (loan) decreases and the difference between what is owed and the value of the home (equity) increases. Because no monthly payments are made with a reverse mortgage, the reverse is true: over time the amount of the debt increases and the difference between what is owed and the value of the home (equity) decreases. If the loan started out at $50,000, it will increase well beyond $50,000 depending on how long the originator of the loan lives and continues to not make payments. The loan regulations prevent the loan from exceeding 100% of the market value of the home since the home is used as collateral for the loan.
There are some safety guidelines included in the loan regulations. Only people 62 or older with little or no mortgage against the house are eligible. They must occupy the house. There are high origination fees. The loan will be significantly less than the value of the home, and the principal balance of the loan will cap at the market value of the home. The home will be sold to repay the loan once the mortgagor has to move or dies. More details can be found here.
Like any other program, whether this is a good program or not depends. It depends on the circumstances of the individual. If the person needs money, doesn't need to leave any inheritance to their heirs, and they fully understand the program, it may be a fit. It would be wise to consult a trusted financial advisor to make sure it fits your particular situation and to make sure no other solutions exist.
(c) Bonnie Erickson 2006
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