12 Steps to Understanding Reverse Mortgages

1. The lowest the loan amount will ever be is at the closing. This is the exact opposite of a regular mortgage, which gets smaller with each monthly payment.
2. With a reverse mortgage each month the interest owed on any money borrowed is added to the principle. That is why there are no monthly payments. Because of this no one knows how much will be owned at the time the loan becomes due.
3. This puts the borrowers (and their heirs) at great risk! What if the loan amount exceeds the value of the property? No problem, the loan is a non-recourse mortgage. Non-recourse means the most the borrower ever has to pay back is the amount due or the value of the house, which ever is less. No risk, for the borrower or the family.
4. This places the risk on the lender. However, there is federal insurance available to protect the lender from loss. With reduced risk to lenders; interest rates are lower and loan amounts higher. Guess who pays for the insurance.
5. Equity can be accessed through a single payment, monthly payment, a credit line or a combination of all three.
6. A reverse mortgage is expected to last a long time. Because of this the lowest interest rate delivers the greatest value. While the interest rates are typically lower than regular mortgages the closing costs are higher. However, all closing costs are rolled into the loan not paid out of pocket. The borrower never pays any money at closing.
7. Three factors determine the loan amount; the client’s age, the home’s value, and the interest rate. Only adjustable rates are available, and all lenders have the same rates.
8. There are basically three programs. One for homes below $300,000, one for homes above $500,000 and one for homes between the two.
9. The proceeds from a reverse mortgage are debt, they are not taxable. Under current rules, they also don’t affect a borrower’s ability to qualify for Social Security or Medicaid benefits.
10. You can refinance or pay off a reverse mortgage without penalty at any time.
11. The loan becomes due when the home ceases to be the primary residence.
12. You continue to own your home and benefit from its future appreciation