Reverse Mortgages

Overview

A reverse mortgage is a type of mortgage loan that is also known as lifetime mortgage. Senior citizens use this loan to release the home equity invested in their property either as a lump sum or as multiple payment installments. The homeowner's obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves the house to stay in an old age home. Reverse mortgages are like annuities where the principal and interest are paid with home owner's equity.

In a conventional mortgage, you make monthly amortized payments to the lender, and after each payment your equity increases. At the end of the term, when the mortgage is paid in full, you own the property outright. In a reverse mortgage, you make no payments. All the interest is added to the lien on your property. You may receive monthly payments or a lump sum payment of the available equity percentage in accordance to the age of the home owner, and consequently the debt on the property increases each month.

How It Works

The amount of money available in reverse mortgages is determined by five factors. The first factor is the appraised value of the property, minus the cost of repairs that are necessary and any liens on the property. The second factor is the interest rate, as determined by the U.S. Treasury's 1-year T-bill, the LIBOR index, or 1-year CMT. The age of the senior citizen (older senior citizens receive more money), the location of the property, and whether the payment is taken as a line of credit, lump sum, or monthly payments are the other factors that determine the amount receivable. A line of credit will maximize the money available, while a lump sum provides the cash immediately. Monthly payments are set up as "tenure" payments.

Benefits

The benefits of reverse mortgages are pretty straightforward. The idea is that you have built up a lot of equity on your house, and you will not live forever. So, you can use that equity as a source of income to cover your expenses during your golden years, and improve your quality of life.

Cost/Pricing

The primary cost of a mortgage loan is the interest you pay, and this can vary dramatically, depending on the terms of the mortgage. If you refinance your mortgage loan, you may get better terms and save money in the long run.

Timing

Research reverse mortgages before you opt for one, so that you can get the best terms. Ideally, you should keep in mind the possibility of a reverse mortgage and look for a house accordingly, when you decide on buying a house.

Companies/Industries

Many companies and brokers can help you figure out whether reverse mortgages are right for you, ranging from your local bank and national banks to institutions specializing in local lending. You should get a variety of quotes from a range of lenders and base your selection primarily on who can offer you the best terms for your mortgage loans. Some companies that offer reverse mortgages include Bank of America, AARP, and Wells Fargo.