Calculating the Benefits of a Reverse Mortgage

Reverse mortgages have waxed and waned in popularity over the years -- sometimes being viewed as seniors' saviors, other times as risky rip-offs. One truth is that reverse mortgages from reputable lenders can salvage a lifestyle and a home while saddling the homeowner with almost no risk. Another truth is that these loans can be quite expensive. Learning more about this unique mortgage loan product can help you determine if a reverse mortgage is for you.

Reverse Mortgages: Salvation for Some

As our population ages and medical resources such as Medicare become more restrictive, reverse mortgages may become a blessing to us.  Reverse mortgages allow a homeowner who is 62 and older to access funds if they have equity in their homes. Reputable lenders are approved to offer HUD reverse mortgages called HECMs (Home Equity Conversion Mortgages) and Fannie Mae has a product too. Other lenders also sell proprietary reverse mortgages but their terms are not standard Fannie or HUD. They might be appropriate for those who wish to borrow higher amounts; just make sure that the fees are fair and don't deviate too much from those of approved HUD or Fannie Mae lenders.

Features to Look for

Reverse mortgages come with several nice features. First, you can choose to get your cash in a variety of ways -- a lump sum, payments for a specified period or for life, or a combination. Second, you can remain in your home as long as you like -- the loan doesn't have to be repaid as long as you live in it. Third, you don't have to make payments, so even if your credit isn't good and your income is low you can get a reverse mortgage. And fourth, once your home is sold to repay the loan, any excess over what you owe is returned to you or your heirs.

Reverse Mortgages Aren't for Everyone

No matter how you use your mortgage calculator, the cost of a reverse mortgage is still steep. There is a 2% mortgage insurance fee, mortgage origination points, and closing costs -- which can vary between lenders, so shopping around is advantageous when securing one of these loans.

You also need a lot of equity to get a reverse mortgage, owing nothing or very little on your home. And the loan limits are pretty low -- those who own expensive homes and have good credit might be able to do better with a conventional cash-out refinance. AARP has a good mortgage calculator for reverse mortgages on their web site. Using the mortgage calculator, you can determine your maximum loan amount by plugging in your age, your home's value, and the amount of existing liens that will be paid off. 

Your home and its equity may help you ease into the future with some security. Protect yourself and your home by making sound decisions when it comes time to buy or refinance. Talk to the experts and make sure your choices are sound.

About the Author

Sheryl Landrum is a Loan Officer in San Diego, California and a freelance writer specializing in mortgage issues.