What are the pro's and con's of a reverse mortgage?
In these questionable economic times, the disabled and the retired feel the effects the most. Those that thought their retirement funds were secure have been forced to look to additional and unexpected sources to survive. The media is filled with ads on reverse mortgages that sound too good to be true. So what are the pro's and con's of a reverse mortgage?
We must first understand what a reverse mortgage is. The homeowner(s) apply for a reverse mortgage in the same manner as a standard refinance or home mortgage. The equity in the home is then used to make monthly payments to the home owner. Many of the conventional mortgage loan procedures are the same but some are drastically different.
Pro's
The homeowner(s) can remain in their home permanently and continue life as normal.
The existing mortgage on the home is paid off.
As long as the homeowner(s) reside in the home, no monthly payments are due.
Qualifying for a reverse mortgage is easier than a standard mortgage because credit score and income are not part of the qualification consideration.
A reverse mortgage can be offered in flexible terms including any of the following combinations: monthly income, lump sum distribution and credit line that can be used for emergencies.
The reverse mortgage will not create a situation where the heirs owe more than the home value.
The heirs will inherit the home and after the reverse mortgage is paid off, the balance of the remaining equity is the property of the heirs.
The advantage of a lower interest rate compared to a standard mortgage loan. Approximately two thirds of the reverse mortgage holders have opted for adjustable interest rates because the rates were lower than fixed. A more recent occurrence in the last few years is the fact that there has been between a three percent and five percent interest rate fluctuation on a reverse mortgage. A more clear picture of the true interest rate is one half of a percentage point above the quoted rate. This is due to the fact that the total rate includes the mortgage insurance premium from FHA.
Proceeds are not taxable.
Con's
Reverse mortgage fees are the same as an FHA mortgage but higher than a conventional mortgage due to the insurance costs. The largest costs to consider will be
*Origination fee: typically 2% of the first $200,000 and 1% of the second $200,000 of the property value. There is a maximum of $6,000 and a floor of $2,500.
*FHA mortgage insurance: typically 2% of the property value
*Other fees include: title fees, appraisal fees, doc fees, closing costs that can include flood certification, credit report, wire fee and counseling.
While standard Social Security and Medicare are not affected by a reverse mortgage, there are situations that can affect Medicaid and other need-based government assistance. This situation would be if too much are withdrawn and not spent within a given month time period.
Most people simply don't understand what a reverse mortgage is.
There are many reverse mortgage counselors that can assist with questions as well as on-line guide lines and qualifiers.
The information supplied in this article is not to be considered as medical advice and is for educational purposes only.
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 Investor Advice 2 Apr 2010 |
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