What is reverse mortgage and what are the advantages and disadvantages to the mortgager and mortgagee?

Answer 1

When you own a home, you gradually build equity over the years through two paths. One is through appreciation of the property where the actual value of the home increases. The other is through a declining balance on the home as you pay the loan off that you bought it with. The theory behind reverse mortgages is that when you are on your older years - ie 65+, you probably have paid off your house or come very close to it. If for example you owned a home that is now worth $200,000 and you only owe $30,000 on it, you have $170,000 in equity. You also are still making payments for the $30,000 balance. As you get older you may no longer be able to earn enough money to pay that mortgage payment. In the past, one way to get out ahead would be to sell that house and put that $170,000 in the bank. You could draw interest on it, and live off the money for some time. Once it runs out though, it's gone. And also, you have to still pay for a place to live. Several years ago HUD developed a neat little thing called a reverse mortgage. The way it works is that they will make you a loan based on a percentage of the value, for example, say 80%. In the case above this means that you could take out a loan for $160,000 of the $200,000 house. Then the old mortgage of $30,000 is paid off leaving you with $130,000. And you NEVER HAVE TO MAKE A PAYMENT ON THE HOUSE AGAIN! You can take that money as a lump sum, or in regular monthly payments. YOu stay in the house until you die without ever having to pay back that money. Sounds too good to be true, huh? Well, it's not. HUD makes their money back, and then some. Once the loan is made, the balance still grows with interest. When you die, the house is deeded to HUD who then sells the house. They are assuming that no matter what, the house will be worth more in the future than it is now. So when it salls there should be enough money to cover the "loan", AND interest. At that point, once the loan is paid off and the interest is paid ff through the sale of the house, anything remaining then goes to your heirs. DOWNSIDES: If you were planning on leaving a house to an heir, they will have to BUY the house from HUD instead of it landing in the estate. They will basically have to take out a new mortgage to cover the principal owed plus interest. This is how most regular home mortgages work anyways.