Mechanics of a Reverse Mortgage Home Loan

Q: What is a "reverse mortgage?"

A: Simply put, reverse mortgage home loan programs are an option exclusive to Senior Citizens.

Allow our experts to elaborate:

Many Senior-Citizens are interested in a reverse mortgage. With a reverse mortgage there are no monthly payments, nor can the homeowners outlive their equity. The accrued principal and interest come due when you either move out of your home for longer than 12 months, sell, die. The home is then sold, the reverse mortgage is paid off, and the remaining equity goes to the heirs.

Many brokers however, push borrowers to a home equity credit line instead because there are no up-front costs and he earns a sales fee. If you need additional income, how would you make the monthly payments on a home equity credit line? Although the interest rate will be a little lower than for a reverse mortgage, you would probably have to borrow more money each month to make the monthly payments. Eventually, you will use up their credit line.

Lender profits come from three areas:

Borrowers fees.
Yield spread premium fees paid by the actual lender for producing a loan with an above-market interest rate.
Junk fees for non-specific services.

It is important to know that up-front reverse-mortgage fees can be quite large. For this reason, unless you expect to live in the home at least five years, a reverse mortgage is usually not a good financial idea.

Mortgage Advice by Stockton Marquette
Mortgage Advisor | Columnist | Rate Forecasting