Reverse Mortgage
A reverse mortgage is exactly what it sounds like, a mortgage that pays you instead of the bank each month. This program is designed and limited to people with a lot of equity in their home and they must be at least 62 years of age to qualify. The loan requires no repayment as long as the borrower remains in the home. The approved funds can be drawn with an initial lump sum, through a line of credit, set monthly payments or a combination of these methods. Typically the maximum you can borrow is based upon the borrower's age, the amount of equity in their home, and the amount drawn each month. Try using the reverse-mortgage calculators at the National Reverse Mortgage Lenders Association (www.reversemortgage.org). Plug different values into the calculator to get a feel how these calculations work and what factors influence each outcome.
No Credit Qualifying
There is no credit qualifying or income and debt-ratio qualifying like a conventional mortgage. Remember that borrowers do not make payments so there is no qualifying to determine the likelihood of their repayment. The interest rate is typically the same for every borrower dependent upon market conditions. There is no way to buy up or down the rate so the broker can make a fee from the bank on the backside of the loan. The originator is in fact paid by charging the consumer points. In effect, Reverse mortgages can be quite costly and are only suited for certain people.
Reverse Mortgage Not For Everyone
The typical reverse mortgage candidate is someone who either owes nothing on their home and has little income, a widow who has not worked and does not plan on joining the workforce, or a couple who has retired and simply wishes to not have to worry about the fundamentals of a cash-out mortgage and enjoys the freedom of receiving payments monthly. In our opinion, the only drawbacks are that the costs associated with this mortgage are 2 - 3 times that of a conventional mortgage. So unless a person simply cannot qualify for a conventional mortgage because they receive little income it may be in their best interest to either cash-out 80% of their equity into one-lump sum and place into an interest bearing account or take out a Home Equity Line of Credit so they can access the funds whenever they wish. By doing this, it will save the borrower $1000's in closing costs.
In summary, a reverse mortgage is not for everybody, but it is a great alternative for some seniors. It is a worry free way to enjoy your Golden Years for some, but it does come with a larger price tag than many other mortgage types. Make the right decision when contemplating this mortgage, with a little discipline and self distribution of your assets, one can achieve the same results.