The ins and outs of reverse mortgages

With traditional forward mortgages, the service fees are factored into the monthly payment.

"The reverse mortgage loan has that same servicing requirement but just doesn't have the revenue stream incoming to pay for that, so that's where the whole concept of the SFSA came about," Cesario says.

Mortgage brokers can also affect how much you pay for SFSA if they perceive the margin on the loan to be too low.

"Sometimes he won't allow a $25 SFSA because he may be able to realize a higher yield spread on $30 or $35," says Warren Abelson, manager of reverse mortgages at Advanced Mortgage Solutions of South Florida in Boca Raton, Fla.

In other words, if the loan terms are favorable in one respect, the mortgage broker will look for other ways to make more money on the deal.

Borrowers should shop for the best SFSA and margins, in addition to interest rates, and should compare at least two or three loan offers, Abelson says.

How to extract money

"You get your money one of three ways," says Walters from Quicken Loans.

"You can either get a lump sum, you can get a line of credit that you can draw on, or you can get an annuity-like arrangement that will pay you a certain fixed dollar amount for life and you never have to make a payment."

You can also get a combination of a line of credit plus monthly payments for as long as you live or for a specified term. In any case, income from a reverse mortgage is tax-free.

There are advantages and disadvantages to all these options.

A lump-sum payout may be ideal for borrowers who still owe money on a regular mortgage but would like to pay it off and get rid of monthly mortgage payments. The downside is you will accrue more interest on the loan over a longer time frame.

Some borrowers opt for the credit line and draw on the money only when they need it.

Interest accrues only on the outstanding balance. If money is conservatively drawn from the credit line, credit availability should theoretically remain high for emergencies. However, a home equity line of credit works much the same way at a reduced cost.

The annuity-like arrangement is ideal for borrowers who need a steady income stream to either supplement existing income or to pay for ongoing bills and expenses.

The upside is that you can get this payment for life, which can work in your favor if you live longer than actuarial estimates project. If you receive more payments than your home is worth, you (or your heirs) will never owe more than the value of the home.

The downside in that scenario: There won't be anything left for your heirs.

Homeowners considering a reverse mortgage should not enter lightly into the decision. These products can offer a much-needed lifeline to assets or an unnecessary drain on assets to the unsuspecting consumer. In any event, they are generally more costly than other loans.


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