What You Need To Know About Reverse Mortgages

December 22, 2008


It is hard to watch TV without seeing an advertisement for reverse mortgages. “Over 62 and own your home? Make your home work for you!” As with most things, however, reverse mortgages are not as rosy as the advertisements. If you are considering a reverse mortgage, you should proceed cautiously.

First, ask yourself how long you plan to stay in your home. While it is true that you will never have to pay back the reverse mortgage as long as the home is your primary residence, if you need to relocate the mortgage will first have to be satisfied. This means that if you decide to move to another area or into “assisted living,” your home will either have to be sold to pay off the reverse mortgage or the reverse mortgage will have to be paid off with a new mortgage.

FHA-insured reverse mortgages are very expensive. Unlike other mortgages, these carry a 2% insurance premium plus a 2% origination fee. This is in addition to your other normal closing costs. So, if it is likely  you will not stay in your home for at least 5 years, a reverse mortgage is probably not for you. There are better products out there if you are in need of money. You might want to consider an equity line of credit or second mortgage.

It is true that you will never owe money even if the value of your home is less than the reverse mortgage. This is because the lending limits are very low when compared to the value of your home. Usually the maximum reverse mortgage loan is about 60% of the equity in your home. For example if you are 70 years old and own, free and clear, a home valued at $200,000 in Palm Beach, Florida the maximum FHA reverse mortgage is only $114,000. Also, that 2% insurance fee you paid is to cover any loss.

Reverse mortgages are now highly regulated. Before you can even qualify for a reverse mortgage you must participate in a consumer counseling session with a HUD approved and independent counselor.

In the right situation, a reverse mortgage might be right for you as an effective way to use the equity in your home to supplement retirement income. If you are interested in how much additional income you may be able to receive from a reverse mortgage, click here for a free calculator.