Reverse Mortgage

3. 2. 1. Run.  You probably want to reverse and run out of this page because most people think they will not ever use a reverse mortgage.  Let me explain the basics and why more and more people will be touched by this loan product that was created for seniors over the age of 65 (a few products cater to those over 62 but are more restrictive).

Lets start with the traditional mortgage.  You borrow money against your home and pay the loan back each month and in equal installments until it is paid in full or sold (assuming a fixed rate).  During this time the portion of your payment that goes toward pinciple is a gain in your equity in the home.  Now compare that to the Reverse Mortgage.  With the reverse you borrow FROM the equity in your house and it is not paid back until a life event (home is sold, death of borrower, or borrower moves).  The longer the reverse mortgage goes unpaid, the larger the loan becomes because the balance of the loan grows at a predetermined rate (usually 5-8% depending on the amount of the original loan). 

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Example:  Your home is worth $400,000 with a $100,000 mortgage.  The reverse mortgage calculation (based upon age, location and loan maximums) determines how much you are eligible to borrow.  In this example we will assume $250,000 as the eligibility amount.  $100,000 is used to pay off the existing mortgage (must do this) and the remaining $150,000 is used as the basis of your “payout”.  This payout can typically be in the form of equal payments for life, line of equity, lump sum, or chosen monthly amount.   Now assume that $150,000 is held long enough at 5% so it grows by $50,000 at the time of the borrowers death.  The estate would then owe $200,000 upon sale of the home.

Reverse mortgages are primarily a product of necessity.  With closing cost running between $15,000 and $18,000 they are not to be taken lightly.  Typical driving forces behind the necessity include unexpected health expenses, outliving retirement funds or other cash emergencies.   Data suggests that extended life spans, lowered standards relative to required savings and the rising cost of health care are the perfect storm that will feed the future growth of these products.  You can find detailed reverse mortgage coverage here http://www.aarp.org/money/revmort/.  Hers is the HUD resource for reverse mortgages http://www.hud.gov/offices/hsg/sfh/hecm/rmtopten.cfm.

Questions?  Email me at michael.pfeffer@pncmortgage.com.

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