I recently received an email from a reader that seemed to understand the concept of a Reverse Mortgage, but still did not completely understand what exactly a Reverse Mortgage was.  Oddly enough I kind of understand where he is coming from.  Think about all the things in life you fake.  Or the things you have just enough information about to get you in trouble.  I was a mortgage banker in my previous life.  (Sometimes I feel like a cat, I have so many lives).  In any case, my point was that I was extremely successful prior to the collapse of the market.  I had a great client base, built up of many successful retirees, developers, and well-backed investors.  With a little bit of cash, or a great story, I could get the deal done.  In a short time my client base was out of date and replaced with FHA Loans.  Unfortunately for me, I didn’t have a single FHA Loan profile.  Being obstinate, I wasn’t looking for one either.  I could easily compare myself to the reader in that I can tell you that FHA is for buyers looking for homes lower in value, you can go to 97% Loan to Value, there are advantageous programs to support the purchase, and the rates are favorable.  Yet I really have know idea what an FHA Loan is, nor am I 100% confident that I could put one through, or recognize the characteristics of one.   So yes, talking about a Reverse Mortgage intelligently as the reader did, and yet asking what one was, is not far from my comprehension.

In a traditional mortgage that most of us are familiar with, you pay it forward.  That is to say, you take out $200,000 and pay it back with interest over 30 years.   At the end of the term you own your home free and clear.  With a Reverse Mortgage, its the opposite, (as the name would imply).  With a Reverse Mortgage, you tend to own your home free and clear going into it, (or have substantial equity), and your mortgage pays you.  In this case you would take out $200,000 and the bank would pay you.  Now the neat feature is that instead of making payments as with a forward mortgage, the bank makes the payment to you.  Now you also have the option of taking the $200,000 out in a lump sum, a line of credit, or a combination of any of the three. 

The common misconception is that the bank is buying your home for the loan amount.  This is not the case at all.  You retain the title on the home, and should you leave the home, the loan is paid off and the remaining equity goes back to the estate.     As an example, a home that is valued at $700,000 and has a Reverse Mortgage of $250,000, would yield the $700,000 minus $250,000 plus any accrued interest, back to the Estate.  Furthermore the money received from the Reverse Mortgage is TAX FREE!  The Equity in your home could be more valuable than some retirement plans.  Reverse Mortgages won’t affect any Medicare, Medicaid, or Social Security benefits.  

Now the second part to the readers question was, is it always a good idea?  No.  A Reverse Mortgage is not ALWAYS a good idea.  When it comes to major financial decisions you need to have an expert, such as a financial planner, assisting in guiding you through all the options.  There are so many factors involved with a reverse mortgage that determines the value of it, that you really need have to envision the overall financial spectrum, before making a decision. 

However I do feel that reverse mortgages are often overlooked as viable financial tools.  I feel that people often look at the initial cost of executing one, and turn away without exploring how it plays in the total package.   Think about it: What if you took out $200,000 with a reverse mortgage; put it into an investment; left your home; cashed out on your investment now worth $275,000.  You could pay off your $200,000 lien and give your heirs $75,000.  So while a Reverse Mortgage is not always a good idea, I would say its always a good idea to explore one with a mortgage professional and a trusted financial planner.    

A Few More Related Articles of Interest:

An Unfortunate Reverse Mortgage Saga (Continued)

Does a Reverse Mortgage get a bad Rap?

Zillow.com Online Home Value Estimates – How Good?

GFE – Good Faith Estimate

An Unfortunate Reverse Mortgage Saga