Although critics hone in on the high closing costs often associated with a reverse mortgage, advocates praise the ease and flexibility with which a reverse mortgage can be taken out and used. A borrower does not need good credit or income as long as he owns a house with substantial equity. He can take the loan out with a fixed or adjustable interest rate and accept proceeds in a lump sum, monthly payment and/or line of credit. Up until he moves out of the house, he can forego payments, make partial payments or fully repay the loan at anytime.
Terms and Process
A reverse mortgage is a home loan available to homeowners at least 62 years old. Qualification is based solely on homeownership and equity. The maximum loan amount, set annually by the federal Department of Housing and Urban Development, was $625,500 as of early 2011. Payments are not required as long as the borrower -- or last remaining borrower if the loan is taken out by a couple -- remains living in the house. The duration of the loan, then, is not fixed. In some cases, it may be 10 years, in others, more than 30.
A reverse mortgage does not come due until the borrower sells the home, dies or moves out for 12 consecutive months. At that time, the borrowers or heirs sell the home to repay the loan. By the time the loan is paid, the balance may be several times the original loan amount because interest was not paid and instead accrued on the principal.
Advantages of Paying Early
Although you do not have to make payments on a reverse mortgage, the terms do not prohibit you from making them. You can choose to pay the monthly interest charge, in whole or in part, or pay both principal and interest. You can fully repay the loan at any time without penalty. The mortgage interest payments are tax deductible, the same way and under the same rules, mortgage interest on traditional home loans are. If you only need a home loan for a limited time, and you cannot qualify for a traditional mortgage, you can take out a reverse mortgage and then repay it, leaving 100 percent of the equity in the home for your heirs.
Disadvantages of Paying Early
Borrowers are required to buy mortgage insurance which compensates the lender for any difference between the home value and loan balance, should the home not appreciate as quickly as the interest accumulates. Although there is one type of reverse mortgage, called the HECM Saver, that carries smaller mortgage insurance than others in exchange for a lower loan amount, any type of reverse mortgage will be more expensive than a similar traditional mortgage that does not require mortgage insurance. When you keep a reverse mortgage for the balance of your life or as long as you need a home, you live mortgage-free and never have to personally pay for the closing costs -- or any other part of the loan. The proceeds from the sale of the house repay the loan, or a combination of the house sale and the mortgage insurance, if the sale price is less than the loan amount. If you choose to repay the loan early, you have to repay the principal, interest and closing costs, with or without selling the home.
- The Federal Reserve Board: Reversing the Trend -- The Recent Expansion of the Reverse Mortgage Market; Hui Shan; 2009
- Reverse Mortgage Daily: HUD Extends Higher Reverse Mortgage Loan Limit for 2011; John Yedinak; December, 2010
- Reverse Mortgage 360: About Reverse Mortgages
- IRS.gov: Publication 936 - Main Content
Mary Gallagher runs Mary Gallagher Planning (mgaplanning.com), an urban planning and consulting business in San Francisco. She is the former assistant planning director for San Francisco and planning director for San Mateo. Gallagher has been writing about real estate, development and land use for numerous websites since 1995. She holds a master's degree in historic preservation planning from Cornell University.