The Reverse Mortgage

In a nutshell, a reverse mortgage is a loan secured by real property. The loan is made in monthly installments or a lump sum to the home owner. The homeowner may live in the home for as long as they want or until the homeowner is deceased. At that point the property will become an asset of the bank and sold off at market value. If the homeowner sells the property prior to the term set forth in the reverse mortgage note than the loan must be paid back at closing of the sale.
There are a few things to consider before committing to a reverse mortgage.
1. You must be 62 years of age or older. However, the older you are the less attractive a reverse mortgage looks. Let’s say you are in your 80’s, it may make more sense to take an equity loan on the property to meet your expenses as opposed to a reverse mortgage. With an equity loan you may be able to supplement your needs and only pay interest on the money that you use from that line of credit. Another option is to refinance the property and pull the equity out. All though the interest rate may be lower with refinance terms the interest will be bases on the entire amount rather than the amount used. When the Real Estate market turns upward you may be able to sell the home at a profit, pay off the equity line or refinance and walk away with a substantial amount of profit in your pocket. The key here is that you must have equity in the property to take advantage of either a reverse mortgage or an equity line.
2. I don’t believe the banks are trying to rip anyone off as some would have you believe. However, they are in the business to make money. They have stockholders to appease. Look at the numbers, how much will they be paying you and for how long (assuming you take the loan in payments). Are you getting a good return for what may be your most valued asset? These banks are making an investment. They want a high return on their investment. They do not represent you. You need to take a hard look at your personal situation and yourself. Do you need this money or can you live without it. Are you in the best health you can be? Do you see yourself living to the ripe old age 85 or more? If your 62 years of age or more, smoke, drink and are overweight, the reverse mortgage is not a loan product you should be looking at. Remember if you move out of the property for any reason, such as you are incapacitated, go into assisted living or death, the property becomes an asset of the bank. They gain an asset at a fraction of the value and your heirs receive nothing (than again who wants to leave anything to those pesky heirs). Thus the banks get a return on investment and the stock holder thank you for adding to their bottom line.
3. The reverse mortgage has high fees and interest rates associated with it. The banks these days are holding far too many toxic assets (foreclosures) and want to protect the investors (what few they have left). If the structure of the loan is attractive to the bank than you can bet that it is not as attractive to the property owner. You should expect a fair deal, not a great deal. Due diligence is key here and always a good course of action.

Good luck and God Bless

The intent of this blog is not to give legal advice. You should always consult an attorney for legal advice.