REVERSE MORTGAGES

 

What are they and how do they work?

 

According to some advocates of the elderly, a reverse mortgage may just be the solution to income problems faced by many senior citizens, which sometimes are forced to sell their homes.

 

A reverse mortgage, essentially an upside-down conventional mortgage, provides access to equity in a house without forcing the owner to sell it or take out a conventional home equity loan. Instead of the homeowner making payments to pay off a large sum borrowed at the beginning, as in a regular loan, the lender in a reverse mortgage makes monthly payments to the homeowner over a period of years. When the house is sold at the end of a fixed term, or when the borrower dies or opts to sell, the borrower or his estate pays the principal and interest in a lump sum. The lender may also get part of the house's appreciation.

 

An open-ended reverse mortgage is, in effect, a combination mortgage and insurance policy. The monthly payment is guaranteed until the borrower dies or sells the house, and in return for the extra risk of an open-ended guarantee, the lender receives a share of the house's subsequent appreciation, if any. The size of the payment to the owner depends upon a calculation of such factors as the owner's age, the value of the property and the percentage of the value, and its future appreciation, mortgaged.

 

A fixed-term reverse mortgage establishes a set term, such as five years, after which the loan must be repaid with interest. The borrower may repay the loan without selling the house, as with home equity loans. However, many retirees who would not qualify for home equity loans because they no longer have regular employment income can qualify for a fixed-term reverse mortgage. Monthly payments are generally higher with this type of reverse mortgage and the owner does not have to share any of the house's appreciation. Examples of these types of loans follow.

 

 

 

FIXED - TERM   Borrower receives a monthly payment and then repays the loan plus accrued interest after a set term. Based on a 10% interest rate for an $80,000 house.   Term Length Monthly payment to borrower 5 years $ 819 7 yeas $ 524 9 years $ 364 11 years $ 265

OPEN - ENDED   Guarantees a monthly payment until borrower sells or dies. Based on an 11.5% interest rate for an $ 80,000 house.     Age of borrower Monthly payment to borrower 70 $ 313 75 $ 391 80 $ 561