The older you are, the more a reverse mortgage will pay you
Many older people are resorting to reverse mortgages, but because of high fees it’s best to wait until you really need the money. Like any mortgage, a reverser is a loan that uses the property as collateral. The difference is that the borrower doesn’t have to make monthly loan payments or have an income to qualify, although he or she must be at least 62.
Instead, the debt and accumulated interest charges are paid off only when the property is sold - even if that’s not until after the borrower has died.
The loan can be taken as a lump sum, line of credit or a fixed monthly income that can continue for the borrower’s lifetime, even if the total received eventually exceeds the property’s value. However the money is taken, it is tax-free, since it is a loan, not income.
Because the borrower makes no payments, interest is charged on interest. But the total owed - principal plus interest - can never exceed the value of the property. The lender cannot foreclose or ever require you to pay the debt during your lifetime, except in some extreme cases such as bankruptcy.
So even if the home’s value were to fall, neither you nor your heirs would ever owe more than can be raised by selling the home. If the home ultimately sells for more than is owed, you or your heirs get the difference. (You can pay the debt off early, thus stopping interest charges from accumulating.)
The catch, as I said, is high costs compared to conventional mortgages.
Among those are a 2 percent loan origination fee and a 2 percent insurance payment to protect the lender in case the property ultimately fetches less than the borrower owes. There’s also a 0.5 percent annual insurance fee. Up-front costs can generally be folded into the loan.
Currently, with the annual insurance fee included, interest runs from about 6.7 percent to 8.3 percent, compared to a little over 6 percent for a conventional loan. Also, most reversers are adjustable mortgages with interest rates changing every year, or even every month. So you could end up paying more.
Another drawback: You cannot borrow as much as your property is worth. That helps assure the lender that the property will sell for more than is owed.
Finally, the amount you can borrow depends on your age, with an older borrower getting more because there’s less chance of debt growing larger than the property’s value.
Consider a hypothetical homeowner with a property worth $500,000. Depending on the type of loan, the limit for a reverse mortgage might be $270,000 to $417,000.
But a 65-year-old would be allowed to borrow only $94,150 to $162,450. Up-front fees would drop the figures to $79,651 to $141,729.
An 85-year-old in the same property would do better, with a maximum loan of $217,142 to $253,319. The fees would cut those to $198,300 to $236,310.
Source: JEFF BROWN - KNIGHT RIDDER NEWSPAPERS
