All Reverse Mortgages
With a reverse mortgage, you never have to make monthly repayments for as long as you live in your home. As a matter of fact, the opposite occurs: the lender pays you money. You can get money from a bank when you have a reverse mortgage in one of three different ways: a lump sum, a line of credit or monthly payments.
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One of the major factors affecting Reverse Mortgages in today’s violent and insecure market is the value of appraisals. This is one of the largest hurdles to face in the Mortgage Crisis that is affecting the Economy in the United States and the world economy as well. In this article we will discuss the impact of appraisal values on Reverse Mortgages, the best way to ensure that you are making the correct decision when getting a Reverse Mortgage in these turbulent economic times, and the steps to take when evaluating what to expect from your Reverse Mortgage appraisal.
Repayment and Forfeiture
Most, if not all reverse mortgages will not require you to make payments or repay the loan for as long as you live. Once you pass on your heirs will have the opportunity to remortgage the debt or sell the house and repay the loan. If the home has equity above the amount owed to the bank your heirs will receive those proceeds. If the home is “upside down” your heirs have no obligation to repay the debt, but they will forfeit the home unless they pay the amount owed.
Cost and Interest Rates
At the inception of reverse mortgages they were almost exclusively offered with adjustable interest rates. Adjustable rates are still standard practice and you are almost certain to be offered this option to begin with. Don’t! There are fixed rate programs available now and at today’s rates adjustable rates are only going to go up in the future. It’s easy to be lured into an adjustable rate because lower interest rates in a reverse mortgage have higher monthly payments. If the interest rate increases your payment decreases, as does the time frame you have to draw on the mortgage. Just remember, adjustable interest rates are a gamble and Las Vegas wasn’t built on winners.
Upkeep, Taxes and Insurance
On traditional mortgages your escrow payments are added to your payment but they are subtracted from your monthly check on a reverse mortgage. Most of the time you will be shown the monthly amount you will receive each month BEFORE the escrows are taken out. This means that you could sign up expecting to get $900 per month and only receive around $700. Make sure you are given the monthly payment LESS your escrow payment. Like most mortgages you will usually be given the option to escrow or not to escrow, however the bank has a vested interest in your home. Meaning if you do not maintain your insurance and taxes as they deem responsible they can call the loan or force an escrow account on you.
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Rising Debt, Falling Equity
Reverse mortgages have a different purpose than conventional mortgages do. With a conventional mortgage, you use your income to repay debt, and this builds up equity in your home. But with a reverse mortgage, you are taking the equity out in cash. So with a reverse mortgage:
- debt increases; and
- home equity decreases.
It’s just the opposite, or reverse, of a conventional mortgage. With a reverse mortgage, the lender sends you cash, and you make no repayments. So the amount you owe (your debt) gets larger as you get more and more cash and more interest is added to your loan balance. As your debt grows, your equity shrinks, unless your home’s value is growing at a high rate.
A reverse mortgage is a “rising debt, falling equity” type of deal. But that is exactly what informed reverse mortgage borrowers want: to “spend down” their home equity while they live in their homes, without having to make monthly loan repayments.
Conventional Mortgages
You can see how a reverse mortgage works by comparing it to a “conventional” mortgage — the kind you use to buy a home. Both types of mortgages create debt against your home. And both affect how much equity or ownership value you have in your home. But they do so in opposite ways.
“Debt” is the amount of money you owe a lender. It includes cash advances made to you or for your benefit, plus interest. “Home equity” means the value of your home (what it would sell for) minus any debt against it. For example, if your home is worth $3000,000 and you still owe $120,000 on your mortgage, your home equity is $180,000.