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What are Reverse Mortgages?

What are Reverse Mortgages?

We're starting a series of articles to help our readers make better financial decisions. This article is on reverse mortgages which many people have never heard of or understand. Reverse mortgages are designed for homeowners 62 or older wanting to gain access to some or all of the equity in their home. With mortgage rates today so low right now any type of mortgage is more affordable then it has been.

You could just go out and get yourself a home equity loan, home equity line of credit or refinance your mortgage and take cash out but doing any of those options will saddle you with a monthly mortgage payment. Most people in retirement age have a fixed income with social security, possibly a pension and interest income. Current savings account rates and CD rates are extremely low right now which has crimped many retirees income.

Now too "What a reverse mortgage is?" A reverse mortgage is a mortgage loan that is secured by your home which allows you to receive payments from mortgage lender monthly over time or all at once. The loan is based on a percentage of the value of your home.  As you receive monthly mortgage payments, these payments are added to a total loan balance, just like paying off a mortgage pays down the principal balance.

Just as mortgage interest is charged on a regular mortgage interest is also charged on a reverse mortgage. With mortgage rates today so reasonable either way you will save a ton of money.

Homeowners 62 or over can obtain a reverse mortgage but there are other restrictions as well. You must use the home as your primary residence, which means you live their most of the year. You can't have a current mortgage or if you decide to get a reverse mortgage pay off the balance of the current mortgage.

There are a few flavors of reverse mortgages just like there are with regular mortgages. Each mortgage has different mortgage rates today for each type of loan.  Most reverse mortgages are made under a Federal Housing Administration (FHA) program and have FHA mortgage rates associated with these loans.

These loans are called Home Equity Conversion Mortgages or HECMs and have government insurance associated with them that protects the mortgage lenders investment.

If the mortgagee (homeowner) can't make the payments anymore the goverment steps in a makes the payment. This is the only type of reverse mortgage that has this type of protection for the lender.

How much money the homeowner can take out on a reverse mortgage depends on many factors as well. Your age, the home's vaule, where mortgage rates currently are. The amount of the mortgage loan will be larger the older you are, the more valuable your the home is and if today's mortgage rates are lower.

When you take out a reverse mortgage you can have payments made in a fixed monthly amount or have a large payment all at once. Fixed payments can be for a certain period of time or until you die as long as you have enough equity in the home and as long as you stay in the home.

Beside the mortgage interest rate there are other costs with a reverse mortgage just like there are with a regular mortgage. There are fees, up front costs, closing costs and points. Just as with a tradtional mortgage these costs can be rolled into the reverse mortgage loan.

Reverse mortgage loans may have relatively low interest rates, but other costs can make it more expensive than other types of loans like a home equity loan or refinacing with cash out. As with a regular mortgage, mortgage rates on a reverse mortgage may be variable, increasing or decreasing with the "prime rate" or tied to other market rates like the LIBOR. There are also fixed mortgage rates on reverse mortgages.

The biggest factor between a regular home loan and a reverse home loan is you don't make montly payments with a reverse mortgage. The money you are loaned and interest is added to the loan balance. Most of the time you do not need to make any payments until you stop using the home as your primary residence, if you sell your home, die or move into assited living. At this time the mortgage loan becomes due in full and the home is sold to pay off the reverse mortgage.

When thinking about your options compare all types of loan products, revere mortgages, standard mortgages and home equity lines of credit and home equity loans. Also compare the current mortgage rates on all types of loans and decide which loan makes the most sense for you.

Author: Robert Till
October 10th, 2011