Reverse Mortgage Pros and Cons

Reverse mortgages do not have a repayment schedule like traditional mortgages and are typically not repaid until the borrower dies, moves, or refinances. As such, reverse mortgage terminations are based on life expectancy and voluntary loan payoffs associated with moving out of the mortgaged property. Reverse mortgages likely will be used when a senior needs cash on a monthly basis, is in foreclosure, or has large medical expenses to be paid. Reverse mortgages are a special type of home loan that lets a homeowner convert the equity in his/her home into cash. They can give older Americans greater financial security to supplement social security and improve their quality of life.

The largest drawback to reverse mortgages is the cost. Although not out of pocket it is still a cost. Reverse mortgage origination fees can be very steep. For example, the benefit of never having to repay more than the value of the home comes at a cost: special insurance premiums be paid at closing and throughout the life of the loan. Reverse Mortgage Loans are unlike traditional loans or forward mortgages in many ways. Even the costs are figured differently. Reverse mortgages have evolved far beyond their early days, and FHA's role in evolving and regulating this versatile tool has been substantial. Today's programs are more straightforward than ever.

FHA insurance will cover any balance due the lender. None of your other assets (including personal checking or savings accounts) will be affected by HUD's reverse mortgage loan, and this debt will never be passed along to your estate or heirs. If they want to keep the house they will only have to pay off the reverse mortgage balance and it is theirs.

Interest charged on reverse mortgages is "accrued". That is, there is no payment of interest until the loan comes due. Since you are not making any payments the balance of the loan will increase because of this interest charges. Adjustable Interest rates can change based on changes in published indexes. But the more adjustable they are, the lower they start so they give you larger cash advances.

FHA HECM loans are the most popular type of reverse mortgage and account for at least 80% of the reverse mortgages being done. FHA's HECM program helps you protect yourself from misinformation and predatory lenders because it is regulated by the Department of Housing and Urban Development and they require you to receive counseling through a HUD-approved, non-profit counseling agency. FHA will allow people in high value areas to borrow more money. Your appraisal will be used to determine how much you can borrow as well.

Borrowers who have a high debt to income ratio or bad credit may also find reverse mortgages appealing because the equity in the home and the value of the home are more relevant factors than credit score. The home can also never be foreclosed as long as real estate taxes are kept current. Borrowers who are in foreclosure can actually pay off that mortgage with a reverse mortgage and never have a payment again.

The reverse mortgage scenario can be hard to dig through. If you need any help I recommend AARP or HUD websites for more information. There is also a bunch of articles at http://wisconsinreversemortgages.net