Reverse Mortgage - Is It Right For You?

Reverse mortgages are mysterious which causes a lot of interest for people. You might know a little about them and it may sound intriguing. But really what is a reverse mortgage?

Let's get two items out of the way up front. You have to be over the age of 62 and you have to own your home outright, or nearly outright. We'll get back to this point in a minute.

A mortgage is placed on your property and you receive a lump sum or monthly payments. You don't make any payments back to the lender. Sounds great, right? Well yes and no. The lender will allow you to borrow a percentage of your home's worth. The percentage is based upon maximum loan limits, current interest rates, and the age of the youngest borrower. I know you are probably thinking, "Why does age factor into a loan rate?" It's because a reverse mortgage has some similarities to an insurance product.

The underwriter of the loan is going to determine how much they can loan to you and still make money in the end. Because you aren't making any payments back to the lender, your loan balance is growing every month. The longer the borrower lives the larger the loan balance grows. I don't know how the math people figure out how long people live on average, but the lender is taking into account mortality rates to back into the loan amount.

A Reverse Mortgage Example

Let's say a home appraises for $200,000, and current loan interest rates are 5%. If the lender made a loan for $100,000, the balance would grow to $200,000 in about 14 years. But there are other factors.

There would likely be an assumption of growth in the value of the home (assuming the market is an increasing market). If the growth assumption is 3%, then the value of the house would increase to $297,000 over that same 14 years.

Then there is a determination of life expectancy. If the homeowner is 64 and the average life expectancy is 78, then the lender will not take possession of the house for 14 years.

Also if you take a monthly payment instead of a lump sum, that would change the calculations. This is intended just to give you a quick and dirty example of the math behind how a reverse mortgage works, and since I am not a mortgage professional you would need to do contact someone more knowledgeable than me. If you need some assistance I know just the person. Contact an Arizona mortgage professional.

The reason the reverse mortgage works a bit like an insurance product is because the lender is taking the risk of lending you the money. Because you are not required to make any payments on the loan, you could make out quite nicely if you live a long healthy life. If you think about the example I gave above, what would happen if not only did you live 14 years, but what if you lived 30 years? The loan balance would now be nearly $450,000. But you know what? The lender cannot take your house. They cannot kick you out. Plus they cannot make your heirs pay the difference when you die. A reverse mortgage is considered a non-recourse loan.

On the flip side if you live only 4 years, the house would be sold and the debt would be paid off from the proceeds of the sale. Any remaining equity left over would be passed on to your heirs. While you are still living in the home you are required to continue paying property taxes, insurance, and keep the house up with repairs. If you don't the lender could require you to repay the loan immediately.

Getting back to the original point. You have to be at least 62 years old and own your house outright. You have to own your house outright because the lender isn't going to give you a cash payment if another lender is owed money on the property. If you do owe a small amount of the home you could use the proceeds of the reverse mortgage to pay off the balance on another mortgage, but that's it.

If It Seems Too Good To Be True...

You know the old saying, and I whole heartedly agree. Reverse mortgages are definitely different from your typical mortgage. After reading all the benefits above you might be thinking this is a no-brainer.

It is not all good news though. There is a monthly servicing fee tacked on to the loan balance each month. This helps to ensure that the lender makes their money. You are also going to be paying an above average interest rate on the loan. The lender can't take all the downside risk. There are limits to the amount of the loan also. It depends on which government program your loan falls under. The FHA has a lower cap than Fannie Mae.

You may also be able to find other programs through an Arizona mortgage broker.

Watch Out For Scams

Unfortunately there are people out there that feel they can take care of elderly people. With the mortality tables, fees, interest rates, appraised values, cash outs, income streams, and just the general confusion for most people with math I am sure you can see how unethical people could intentionally confuse people. I'm only in my 30s and I haven't had to do algebra in, gosh I can't even remember, a long time. Forget about it in 30 years! Once I am eligible for a reverse mortgage math is going to come so easy.

The best piece of advice I can give is make sure you talk to a representative from Housing and Urban Development (HUD). You also may want to enlist the help of an accountant, someone that can look at your situation putting your best interest first.

Common scams are to add extraneous monthly fees to the loan. I don't mean to pick on any industry, but we have heard of insurance sales pushing a reverse mortgage as a way to buy a life insurance policy. Lastly, make sure you read that contract thoroughly. Don't do like most home owners and go into closing just initialing and signing all the papers without really reading them. You don't want to sign away your homes appreciation in those documents.

So remember these things regarding reverse mortgages:

You own your home, the lender does not. The title stays in your name.
You will never have to pay back the loan.
You do not need income or good credit to qualify, the house is the only consideration for the loan.
The income you receive is considered debt so there are no income taxes.
Your heirs will not be stuck with a debt when you pass away.
Enlist the help of a qualified individual to help you review the contract and terms.
Be on alert for scams.

Return to our section on Arizona mortgage loans once you
have finished reading up on what a reverse mortgage is.