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Issues to Consider with Reverse Mortgages

By: Barry Waxler A red hot loan package that is getting a lot of attention these days is the reverse mortgage. Common question arise regarding the loan, so let's take a closer look.

The reverse mortgage is exactly what it sounds like. Instead of you making payments to a lender, the lender makes payments to you. While that may sound fantastic, the similarities pretty much end there.

The reverse mortgage is based on the equity in your home. Every time the lender makes a payment to you, it gets a bit of your equity. This equity is held as debt like in a traditional mortgage and interest is charged on the amount.

A thought that may have popped into your mind is what ultimately happens when the equity in the home is used up? If there is no equity, do you still own the home? Are you expected to pay off the loan? Do you get evicted?

In the past, the ugly answer is that you would lose the home. Since senior citizens sitting on a curb did not go over well, the government stepped in. Most plans now allow you to stay in the home even if the equity is used up entirely.

If you are going to be giving away equity, what size of payments can you expect? There is no simple answer. Factors such as the amount of the reverse mortgage, your age, costs and so on all go into the calculation of the payment amount.

If this sounds too vague to you, don't worry. One of the biggest factors is the program you choose. There are different ones offering different payment amounts. You can even take lump sum payments in some cases.

At some point in time, you might realize a reverse mortgage is not for you. Can you get out of it? Generally, you can so long as you pay off the mortgage debt. Make sure to read the loan documents for language on this issue.

Many wonder if they can tap additional appreciation as time passes. If you home grows in value, the answer is you can. Frankly, this is an area that has not seen a lot of action given the relative newness of reverse mortgages.

If the program works well, you will pass away before the equity in your home runs out. Odd to say that, but it is true. At that time, your home will pass to your heirs who will either pay off the mortgage or sell the home.

In some cases, the reverse mortgage makes sense. In others, it does not. The only way to make a determination is to discuss the details with a financial professional.