The ABC's of Reverse Mortgages

Reverse mortgages have been around for a decade but their popularity remains low. The primary reason seems to be home owner's reluctance to take any chance when it comes to their abode. Reverse mortgages are also confusing, complex, and expensive, making them an option of last resort in the minds of homeowners.

How they work.

A reverse mortgage is like a home equity loan with no payback schedule. Instead of having a mortgage you make payments on you have a mortgage that provides income to you. You can choose to take a lump sum payment, a credit line to draw on, or set up a payout schedule much like an annuity. No payments are due as long as you live in your home, however, interest accrues as you access the funds.

Contrary to common perception, the lender doesn't take your home automatically when the loan comes due. Heirs may refinance or sell the home to pay off the balance, life insurance benefits could provide funds to pay off the balance, or the heirs could just use cash to repay the balance if they want to keep the property. If the house is worth less than the amount due, you or your heirs will only owe the lender what the house can sell for.

Costs

Reverse mortgages are expensive. You can expect to pay 6% to 8% of your homes value at the time of loan origination to cover HUD insuring the mortgage, closing costs, and lender fees. Fees are usually rolled into the mortgage so you do not see an out of pocket expense, but it does increase you borrowing costs and decrease the money available for you to access.

For more information see AARP and this item from the Federal Trade Commision.