A Primer On Reverse Mortgages

Economists report that house prices have soared in recent years, the amount of money that households are saving through 401 (k) and FDIC insured savings accounts have fallen. For many people approaching retirement age, which means it can be 'equity rich' and 'cash poor', at the same time. Today is not uncommon to find people living in households with 1 million U.S. dollars, which relies almost entirely on social security to succeed.

A 1994 Advisory Council on Social Security trends and issues concluded that reverse mortgages may provide an additional source of income for older people, but at the same time housing prices have not been sufficient for this a significant source. Well, things have changed.

A reverse mortgage is still a loan with your house as collateral, but it is totally different from the type of mortgage you got when you bought your first house. These are the main differences:

The lender that you pay.

That's right. You do not make a monthly payment of a reverse mortgage. The lender pays the loan and can be configured so that you can receive payments in a lump sum, you can charge the usual monthly or can receive a refund at the time and in the amounts you request.

The terms of the loan determine what each of those amounts. The main determinants are age, the value of your home, and interest rates prevailing at the time.

You still live at home.

Staying at home is really the purpose of reverse mortgages, when you put it. The twist is that instead of paying someone to live there, you get paid while you still live there.

You are really necessary for the loan conditions to continue living at home as their principal residence. You can spend any amount of time visiting their children and grandchildren, you can travel for pleasure, and can continue to spend summers on the lake, provided that the home remains your principal residence.

You retain ownership of your house.

A reverse mortgage is not a sale. You retain all ownership rights it had before the reverse mortgage. You do not need the lender's permission to paint the house a different color or to remodel. You can put your house on the market and sold to the highest bidder. You can love their children.

If there is a change in ownership, as by sale or death of the last surviving owner, the reverse mortgage must be paid at the time. The lender is entitled to receive from the proceeds of the sale only the amount you received from the lender plus all accrued and unpaid interest to date. Any amount left after paying the reverse mortgage lender you go to your surviving spouse, or his heritage.

The principal amount of the loan increases with each payment

Another way of saying this is that you control the amount that must eventually be paid by monitoring the amount of money actually received by the lender. A reverse mortgage is still a loan and the money plus interest must be paid at some point, usually from the sale of the house after you and your husband no longer lives there.

Because the principal amount of a reverse mortgage cannot be determined until they no longer live on the property, cannot and maturity of the loan. This can be a difficult concept to wrap your mind around because it is so different from conventional mortgages.

You can never owe more than the value of your home.

This is true for the two reverse mortgage products sponsored by the federal government (HECM and Home Keepers) although it cannot be true for privately created reverse mortgage programs.

The benefit of federal programs is that you, your surviving spouse, or your heritage, cannot owe more than the loan balance or the value of your home, whichever is less. Your reverse mortgage lender cannot demand repayment from you, your spouse, or their heirs, or any other asset in your home.