Good Golly! What is a Reverse Mortgage?
Just open your mailbox or flip on the TV. In your mail your getting tons of solicitations and on TV are recognized spokespeople talking about the reverse mortgage.
The reality is a solid seventy percent of seniors still don't know what the reverse mortgage is or how it works.
In efforts to clarify I will do my best here.
The first thing to do is throw out any preconceived notion, anything you've heard from some guy, and keep in mind a reverse mortgage is nothing more than a mortgage on your home. The lender loans money using equity as security for its investment.
In this prior paragraph this definition could describe a traditional mortgage or a reverse mortgage. That is my point. I don't want people thinking the reverse mortgage is much different than a forward mortgage.
The point is these two mortgages are structurally similar, with just a few differences.
The mortgage company doesn't really care what the money is used to purchase. It makes money on the interest and servicing of the loan.
There is any number of things we can do with the money from our mortgage. If its a purchase those proceeds are used to pay the seller. If it's a refinance it's limitless.
The point is you are accessing the equity in your home to accomplish something monetarily.
Why do people use a reverse mortgage? Because they can access this money and never be forced to make payments to the lender.
Of course that begs the question, "how does the mortgage company make money?" Now we're talking.
Reverse mortgages are true negative equity loans. That means since the borrower makes no interest payments the interest accumulates and accrues against the equity of the home.
Most times the mortgage lender is repaid its loan plus accumulated interest by the sale of the property. Either the borrower dies or the borrower sells voluntarily.
One thing I would like to get across is the bank never has ownership of the house during the course of the loan.
The reason why everyone is so hot and heavy for reverse mortgages is the fact no monthly repayment is necessary. That is great.
What people must understand is it is not the perfect answer to all financial situations. For example its closing costs can be prohibitively high in the wrong situation.
The reality is a solid seventy percent of seniors still don't know what the reverse mortgage is or how it works.
In efforts to clarify I will do my best here.
The first thing to do is throw out any preconceived notion, anything you've heard from some guy, and keep in mind a reverse mortgage is nothing more than a mortgage on your home. The lender loans money using equity as security for its investment.
In this prior paragraph this definition could describe a traditional mortgage or a reverse mortgage. That is my point. I don't want people thinking the reverse mortgage is much different than a forward mortgage.
The point is these two mortgages are structurally similar, with just a few differences.
The mortgage company doesn't really care what the money is used to purchase. It makes money on the interest and servicing of the loan.
There is any number of things we can do with the money from our mortgage. If its a purchase those proceeds are used to pay the seller. If it's a refinance it's limitless.
The point is you are accessing the equity in your home to accomplish something monetarily.
Why do people use a reverse mortgage? Because they can access this money and never be forced to make payments to the lender.
Of course that begs the question, "how does the mortgage company make money?" Now we're talking.
Reverse mortgages are true negative equity loans. That means since the borrower makes no interest payments the interest accumulates and accrues against the equity of the home.
Most times the mortgage lender is repaid its loan plus accumulated interest by the sale of the property. Either the borrower dies or the borrower sells voluntarily.
One thing I would like to get across is the bank never has ownership of the house during the course of the loan.
The reason why everyone is so hot and heavy for reverse mortgages is the fact no monthly repayment is necessary. That is great.
What people must understand is it is not the perfect answer to all financial situations. For example its closing costs can be prohibitively high in the wrong situation.
posted by Credit Counseling at
2:28 PM
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