Is A Reverse Mortgage Right For You?

By Matt Schaub

There has been a lot of buzz about reverse mortgages, and quite frankly it is confusing. Some tout a reverse mortgage as great way to pay for retirement and others warn that it could actually cost you and your heirs a lot of money. In reality they're both right. Traditionally reverse mortgage products have been plagued by high costs and complexities but recent changes in this product could potentially save consumers thousands of dollars.

A reverse mortgage allows the homeowner to tap into a portion of their home's equity without taking out an equity loan or selling their home. The homeowner remains in the home and the reverse mortgage provides an income stream to homeowners that they do not have to repay until they either: a) sell the home or b) die. Homeowners must be at least 62 years old to qualify.

Rather than paying monthly mortgage payments that include principal and interest, a reverse mortgage lender will pay the homeowner instead. The borrower has a number of options for receiving the money which include a lump sum payment, line of credit or equal monthly payments. Some borrowers opt for equal monthly payments. With this option, the borrower receives payments for as long as they remain in the home. The sum of the payments can actually stretch beyond the value of the home, causing the lender to book a loss.

Reverse mortgages are classified as rising-debt, falling-equity loans, which simply means that as debt increases, home equity falls. The reverse mortgage lender recoups the debt when the home is sold. The debt can never exceed the value of the home, and any remaining equity returns to the homeowner, the estate or heirs.

Competition in the market has increased due to the growth opportunities presented by retiring baby boomers. The increased competition in the private and government sector will pay off for borrowers with lower origination costs and mortgage insurance premiums.

In October 2006, Ginnie Mae, a federal housing-finance agency, announced that, for the first time, it will begin packaging reverse mortgages for sale on Wall Street. It is generally expected that Ginnie Mae�s entry into the market will lower reverse mortgage rates.

Reverse mortgages can be a good solution for the homeowner who has a great deal of equity but very little cash. It provides a way to tap into the equity and stay in the home. Conversely for those seeking a lump sum of cash to finance another investment vehicle, a reverse mortgage is not the best solution as the investment return will not be greater than the cost of the loan.

Currently the cost of a reverse mortgage is very high. Borrowers are charged an origination fee of up to 2% of the home's value, and a mandatory mortgage-insurance premium adds another 2%. There are also closing costs and monthly charges on the loan. The upfront costs on a reverse mortgage can exceed $12,000 for a $250,000 home. The fees are even higher for more expensive homes.

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