Ronald D. From California
Betty T. From Florida |
What’s Different for Reverse Mortgages?
Forward Mortgages vs. Reverse Mortgages The traditional mortgage, which most of us are familiar with are represented by such products as the 30-year fixed, or 5/1 Adjustable Rate Mortgage. These are also called forward mortgages. They are forward mortgages due to the fact that the borrower takes out a lien against his or her home in the form of a mortgage. This mortgage is paid back over time, and in most cases on a monthly basis. Over the years, the debt is paid down and thus increasing the equity in the home. In theory a time will come when the homeowner owns their home free and clear. Reverse mortgages are exactly the opposite. With a reverse mortgage, the loan is taken out by the homeowner based on the equity already in the home. Rather than the homeowner paying the loan back to the bank, as with a forward based mortgage, the bank makes payments to the homeowner. As an example, and using very simple math, the borrower would have a reverse mortgage in the amount of $120,000, and the terms of the note would be based on a ten year period. Therefore the bank would pay the homeowner $1,000 a month for the next ten years. Reverse mortgages allow the homeowner to access the equity in their home without ever having to pay the loan back. Furthermore the funds can be paid out in several formats such as: 1. Lump Sum 2. Fixed Monthly Disbursements 3. A Line of Credit 4. Any Combination of the Above In short reverse mortgages create a situation in which the homeowner has rising debt and falling equity, in return for receiving supplemental tax free income.
Common Features of Reverse Mortgages Although there are a few types of reverse mortgage products available, they all share some common features. Home Ownership – The bank lending you the money, does not want your home. The homeowner remains on the title and is responsible for maintaining the home, paying taxes, and keeping proper homeowners insurance. When the loan term is up, or the homeowner leaves the home, the loan is then repaid along with interest and any applicable fees. However a homeowner can never owe more than the value of the home. Fees – Reverse mortgages are generally more expensive as opposed to forward mortgages. However the fees can be added into the loan balance, similar to a typical refinance. It is suggested that seniors looking for a reverse mortgage speak to several lenders regarding pricing. However 3% of the loan amount is not an uncommon figure to use as a guide. Loan Amounts – Loan amounts are not as straight-forward as with a 30-year fixed for example. The loan amount with a reverse mortgage depends upon the value of the home, age of the borrower, interest rate and withdrawal method. Debt Pay-off – Reverse mortgages are known as “non-recourse” loans. This basically means that they cannot try to collect any more payments other than what the home is worth. For example, a bank may lend $100,000 on a reverse mortgage, but when the homeowner vacates the home, the homes value may only generate $80,000 to pay back the note. The bank cannot come after any other personal assets or the assets of the homeowners heirs, in an attempt to collect the additional $20,000. Repayment –repayment is due when the last surviving homeowner vacates the home. There may be additional reasons that the bank calls the note, or demands repayment. In general they all have to do with situations that puts the banks funds at risks, such as non payment of taxes, failure to keep the home maintained, or failing to insure the property. Other risks include renting your home out, abandoning your home, or legal suites filed against your home.
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