As the 77 million baby boomers enter retirement at a rate of 10,000 per day, the reverse mortgage marketplace is potentially $1.9 trillion according to the Consumer Financial Protection Bureau, of which only about 10% has been penetrated to date. While this mortgage product has been around for decades, it’s affect on real estate markets has reached an influential point today and will remain so going forward.
The pros, cons, and myths of reverse mortgages aren’t fully known today. For one thing, new entries into the market are constantly redefining the rules. However, we need to start examining this increasingly new influence on the real estate marketplace as a whole.
A reverse mortgage can increase the monthly income of a person over the age of 62. If you are considering a reverse mortgage, you will be eligible for more money based on the older you are, the more your home is worth, and the lower current interest rates are.
There are options for how you borrow the money. You can take one lump sum payment to pay off other loans so that your income goes further each month. Or you can have monthly installment payments sent to as an additional source of income. Or you can establish a line of credit that you only draw on when needed.
Unlike conventional mortgages, you’re not building equity in your home. You’re doing exactly the opposite. You’re borrowing against the equity in your home and not repaying the loan. Interest on the loan accumulates each month. If you’re receiving monthly installment payments, the principle on the loan grows each month. If you have a line of credit, the principle on the loan grows each time you access the line of credit. Don’t forget the important aspect of compounding interest. Because you’re not repaying the loan, each month the interest owed is added to the principle of the loan and more interest is owed the next month.
Additionally, because this is a new product on the market, not all of the needed rules and regulations are yet in place. That allows fees, commissions, loan origination costs, and other garbage costs to be extraordinarily high compared to traditional mortgages. By the time you subtract all of the fees and commissions from the loan, you receive much less money than you actually borrowed.
Finally, you are not immune from losing your home to a reverse mortgage. Certainly, you are decreasing the amount of value your estate will leave for your heirs. But further more, if it becomes necessary for you to move into an assisted living facility or nursing home, your reverse mortgage becomes due in full one year after you no longer occupy the home. Same thing if you decide to move to a warmer climate or to a smaller home or from a two story to a one story. When you move for any reason, your primary asset has to be sold to repay the reverse mortgage plus all of the accumulated interest.
Myth #1. A reverse mortgage can leave you with an outstanding balance exceeding the value of the home.
Truth. While this is partially true, the balance owed may exceed the value of the home, this is a nonrecourse loan. You’re not required to repay any balance exceeding the sale value.
Myth #2. People still owing on a traditional mortgage can’t qualify for a reverse mortgage.
Truth. You can’t have both a traditional mortgage and a reverse mortgage. However, you can use the proceeds of a reverse mortgage to pay off the balance of a traditional mortgage. That means you don’t have to make the traditional mortgage payment going forward.
Myth #3. A reverse mortgage can result in you being evicted from your home.
Truth. You cannot be evicted from your home to repay a reverse mortgage. However, events out of your direct control can cause you to have a different primary residence that triggers the requirement that you sell your home to repay the reverse mortgage against it.
Reverse mortgages will continue growing as a new product in the mortgage marketplace. The rules will change and those offering the service will become more innovative. New regulations will come along as the lenders stack the cards in their favor.
If you want another perspective on reverse mortgages, check out the article “Boomers And Reverse Mortgages – Another Crisis In The Making?by Donna S. Robinson.
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