New Jersey Real Estate TipsReal Estate Tips March 5, 2014

What is a Reverse Mortgage?

A reverse mortgage is a type of loan that is available to homeowners 62 years old and older. The loan allows the homeowners to convert part of the equity they have in their home into cash. This type of loan program is designed to give Americans more financial security, especially during a time when a steady income may not be as easy to attain. Many people use the loan to supplement Social Security payments, as well as to pay medical expenses, make improvements to the home and pay for additional living expenses.

Pros and Cons to a Reverse Mortgage

When you think about the concept of the program, it makes complete sense. After years or decades of paying down your mortgage and building up equity, the cash can be paid back to you. And, unlike traditional home equity loans, borrowers do not have to repay the loan. There are no monthly principal or interest payments. You are required to pay real estate taxes, utilities and hazard and flood insurance premiums.

There are still some things to think about, of course, as a reverse mortgage is not for everyone. First are the costs that are involved. Reverse mortgage fees are very high and include the interest rate, loan origination fee, mortgage insurance fee, appraisal fee, title insurance fees and any other additional closing costs. These fees are not paid out of pocket, but instead rolled into the loan.

Additionally, if you need to move out of your home permanently, you would be required to pay the loan back. This may not sound like a main consideration now, but it will be if you need a long-term care facility.

Amount of Payments and How to Receive Them

Is a reverse mortgage right for you? It could be. But it’s important to weigh all of your options, as there are both pros and cons to think about. The amount of money you can get from your home is based on:

  • Age of the youngest borrower

  • Current interest rate

  • Lesser of appraised value

  • Initial Mortgage Insurance Premium

Payment plans can be made in various forms, including:

  • Tenure

  • Term

  • Line of Credit

  • Modified Tenure

  • Modified Term

  • Single Disbursement Lump Sum