Reverse Mortgages

What is a reverse mortgage and how can it help me?

A reverse mortgage turns the value of your home equity into usable cash, which can be used to supplement income, pay for college, finance home improvements and more. Instead of making monthly payments, the lender pays you in the form of fixed monthly payments, or as a lump sum, or as a line of credit that can be tapped when needed (up to a certain limit).

To be eligible for a reverse mortgage you must be age 62 or older and the home must be your primary residence. Even though this is a home loan, you do not have to repay the principle, interest, and fees for as long as you live in your home or the house is sold.

With a reverse mortgage you can annuitize your home. The monthly payments you will receive is computed using standard annuity methods that take into account your age and life expectancy (and your spouse’s if you are joint borrowers), the appraised value of the property, current interest rates, the type of distribution you use, and the amount of equity you decide to assign to the loan company.

For instance, you may choose to take the loan against only 50% of the equity stake in your house. This will result in the reduction of the potential monthly check compared with a higher equity percentage. If property prices decline after you take out a reverse mortgage, it will not affect the remainder of your estate; should something like this happen, the lender bears the loss. This like in a traditional annuity in which the insurance company bears the loss of continuing annuity payments in the event that you live past your life expectancy.

Although you will never owe more than the value of your home when the loan becomes due (upon your death or until you no longer live in it), keep in mind that home values tend to increase over time. However, if the remaining equity is lower than the appraised value, of the property, your heirs might have a hard time paying back the loan if they want to keep the home rather than sell it.

Before getting a reverse mortgage, we stress that you exercise some caution. You will still be responsible for paying property taxes, homeowner’s insurance and all repairs. As for the fees associated with the reverse mortgage, it is generally higher than that of a traditional mortgage. Costs may include, an origination fee, closing costs, and servicing fees over the life of the mortgage. Typically, reverse mortgages have variable interest rates which could rise over time.

The Home Equity Conversion Mortgage (HECM) is a federally insured reverse mortgage that is generally less expensive than private-sector reverse mortgages, though you typically are charged mortgage insurance premiums.

For more in-depth information about reverse mortgages, check out our article on our website here. Or if you would like, call us today at 201-342-3300, one of our associates will be happy to speak to you.