Mortgage news

News, trends and analysis of the mortgage and credit market

Thursday, June 28, 2007

Saving for retirement

Reverse mortgage

Advantages and drawbacks

In general, a reverse mortgage converts home equity into cash in several different ways, ranging from monthly payments to an equity line to one-time payouts -- or a combination.
The amount you can borrow varies according to your age, the value of the home, current interest rates and loan fees.

Although the public has been generally hesitant to embrace them, their popularity continues to climb.

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However, the reverse mortgage market is minuscule compared to that of regular mortgages. Reverse mortgages represent a drop in the bucket -- about seven-tenths of 1 percent of regular mortgages.

Are reverse mortgages a good idea? Most news stories imply they are. Reports suggest reverse mortgages can be a source of ready cash when it's needed.

As with conventional mortgages, reverse mortgage lenders make money through interest, origination fees and points. However, closing costs are significantly higher with reverse mortgages.

In addition, borrowers continue to be responsible for real estate taxes, conventional homeowners insurance and home repairs, and have the added burden of paying for mortgage insurance, too.

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Why would borrowers have to pay mortgage insurance? After all, that insurance is required for regular mortgages if borrowers don't have a large enough down payment, and its purpose is to protect lenders in the event of a default. With a reverse mortgage, there's no such risk to lenders.

Refinance instead?
Some believe seniors should consider borrowing against the value of their homes only as a last resort. If there's no way around it, he says it's smarter to refinance as a 30-year fixed loan.

Here's how that would work: You own a home valued at $300,000. You find yourself in need of a large amount of cash for major home repairs and want a lump sum in the bank for future emergencies. You borrow a combination of cash and upfront costs (rolled into the loan) valued at $100,000 at 6 percent.

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Exclusive of taxes and insurance, you'd be paying back a little under $600 per month on a 30-year loan. And you wouldn't need mortgage insurance because you still have plenty of unencumbered equity.

In the case of a reverse mortgage, younger borrowers can't cash out as much equity as older borrowers. To qualify for a reverse mortgage, you must be at least 62 years old.

Since banks are repaid when the house is sold, it's quite possible a lender might have to carry the note for 20 to 25 years or more. For that reason, a 79-year-old is a much more attractive loan candidate from the bank's perspective.

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Whether the borrower lives six months or 30 years after the loan is closed, he still pays stiff upfront fees. Of course, statistically speaking, older borrowers are less likely to accumulate as much interest as younger ones.

Investigate all the options.

Before committing to a reverse mortgage, take a look at other services available in the community. There are little pools of money around seniors that they are not aware of.

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