Reverse Mortgages: Cashing In On Your Home Equity

You’ve probably seen the TV commercials with Robert Wagner hawking the benefits of reverse mortgages. But what exactly is a reverse mortgage and how does it work? Here is a breakdown of the basics:

What is a reverse mortgage? It’s a loan in which the lender gives the borrower money based on the amount of built-up equity in the home. With a conventional mortgage, debt is paid off and home equity rises over time, whereas with a reverse mortgage, debt increases and equity decreases as money is taken out of the home. Costs, fees and terms on reverse mortgages vary, as does the payout method. Borrowers can get the payout as a lump sum, as monthly payments, as a line of credit, or as a combination of all three. Generally, the mortgage on the home can’t be exercised until the borrower dies or sells the home.

What are the requirements to get one? To qualify for a reverse mortgage, the borrower must be at least 62 years old, live in the home and have any existing mortgages on the property paid off. The home doesn’t necessarily need to be paid off before the loan is taken out, however, as the borrower can pay off the current mortgage balance with the proceeds from the reverse mortgage. Also, the property must be a single-family dwelling, a two-to-four unit property or, in some cases, a townhome, condominium unit or a manufactured home.

How does it differ from a home equity loan? With a home equity line of credit, a borrower’s debt to income ratio, total income and credit rating are important factors in qualifying, whereas with a reverse mortgage, none of those factors affects eligibility. Although both types of mortgages are based on the amount of equity in a home, the costs associated with reverse mortgages are quite different. In order to dispense with monthly payments, fees and closing costs are front-loaded into reverse mortgages. With a home equity line of credit, these fees are often spread out over the life of the loan.

Is a reverse mortgage a good idea for anyone over 62? Reverse mortgages aren’t the best solution for everyone. Not only are costs front-loaded, but origination fees, insurance premiums and interest charges are usually higher for reverse mortgages than for conventional mortgages. Also, borrowers are still responsible for any applicable real estate taxes and homeowners insurance. However, reverse mortgages are well suited for borrowers who have a lot of equity in their home, can afford the upfront costs and plan to remain in their home for at least several more years. ∆