Pros and cons of reverse mortgages |
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But other risks
exist. Mortgage insurance guarantees the lender will receive its full repayment.
For example, a decrease in the property's value adversely affects the lender's
reimbursement. Mortgage insurance also covers the lender in the event the mortgage
is held over a very long period of time and accrued interest exceeds the value
of the home.
It should be noted, though, that when it comes
to a home appreciating in value, there is virtually no difference between conventional
and reverse mortgages. The lender only recovers what it's actually owed. After
the lender's loan, fees and interest are repaid, anything left goes to the homeowner
or heirs.
Refinance instead?
Basich believes seniors should consider borrowing against the value of their homes
only as a last resort. If there's no way around it, he says it's smarter to refinance
as a 30-year fixed loan.
Here's how that would work: You own
a home valued at $300,000. You find yourself in need of a large amount of cash
for major home repairs and want a lump sum in the bank for future emergencies.
You borrow a combination of cash and upfront costs (rolled into the loan) valued
at $100,000 at 6 percent. Exclusive of taxes and insurance, you'd be paying back
a little under $600 per month on a 30-year loan. And you wouldn't need mortgage
insurance because you still have plenty of unencumbered equity.
The
rub here is the monthly payments. However, Basich contends that the fees for this
type of loan are lower, and your remaining equity isn't subject to interest and
other costs associated with a reverse mortgage.
True, in a
conventional mortgage, the money must be paid back starting right after closing,
while reverse mortgages don't fall due until the home is vacated. But, Basich
argues, since the payments on a conventional mortgage are stretched out over a
longer period of time, they're lower and more manageable.
In
the case of a reverse mortgage, younger borrowers can't cash out as much equity
as older borrowers. To qualify for a reverse mortgage, you must be at least 62
years old. Since banks are repaid when the house is sold, it's quite possible
a lender might have to carry the note for 20 to 25 years or more. For that reason,
a 79-year-old is a much more attractive loan candidate from the bank's perspective.
As for the borrower, whether he lives six months or 30 years
after the loan is closed, he still pays stiff upfront fees. Of course, statistically
speaking, older borrowers are less likely to accumulate as much interest as younger
ones.
The matter of Medicaid
Depending on where you live, Basich says the proceeds from a reverse loan could
prove a barrier to qualifying for Medicaid, which counts loan proceeds as an asset. |
