Avoiding Foreclosure Through a Reverse Mortgage
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- Kirk Haverkamp - MortgageLoan.com
With foreclosures continuing to rise, a lot of financially stressed homeowners are looking to loan modifications and similar measures to save their homes. But there’s one fairly effective strategy that hasn’t been getting a lot of attention – a reverse mortgage.
Of course, a reverse mortgage can’t help everyone – they’re pretty much limited to homeowners age 62 and above (although there are exceptions). And you have to have at least some equity in your home – “underwater” homeowners won’t be able to qualify. But if you’re an older homeowner struggling to make your mortgage payments, a reverse mortgage may be the right solution for you
First, the basics. As the name implies, a reverse mortgage works just the reverse of a regular mortgage. Instead of making mortgage payments to your lender and gaining equity in your home, you give some of your home equity back to the lender and receive money in return. The lender recoups its money when the house is sold after you and your spouse eventually move out or pass away.
Many people use the proceeds from a reverse mortgage to supplement their income during retirement, but you can use the money for any purpose you want – including paying off your regular mortgage, if you have enough money. You might even get enough to pay off other debts as well.
Paying off your home loan with a reverse mortgage
This may seem confusing – how can you borrow against your home to pay off the mortgage on that same property? Here’s how it works:
Suppose you have a home worth $300,000 and you still owe $150,000 on the mortgage. In a reverse mortgage, you might be able to borrow about $180,000 against the full $300,000 value of the home and use the proceeds to pay off the $150,000 mortgage.
You’ve now paid off your original mortgage, but owe $180,000 to the bank that issued the reverse mortgage. But you don’t have to make payments on that loan - the bank gets repaid when the home is eventually sold after you and your spouse move out or pass away.
Be aware, though, that reverse mortgages are costly. Origination fees and settlement costs typically amount to around 5 percent of the value of the home – or about $15,000 in the example above, which usually gets tacked on to the $180,000 already owed.
Interest is charged against your home equity
And because you’re borrowing money, you have to pay interest – usually a variable rate comparable to those on regular mortgages. And the longer you stay in the home, the more those interest charges add up on top of the original loan balance, gradually eating away at your remaining home equity. When the home is eventually sold, the bank gets paid the loan amount and the accumulated interest.
One of the nice things about a reverse mortgage is that the bank doesn’t get full claim to your home – it’s only entitled to be repaid the loan amount plus interest when the property is eventually sold. So you or your heirs can still benefit from any appreciation in the property value that may occur.
Considering other options
Because reverse mortgages tend to be expensive, other options such as a home equity loan may offer a better means for tapping the equity in your home. However, because there are no income or credit score requirements on a reverse mortgage, they may be easier to obtain for homeowners in financial difficulty who nonetheless have some equity in their homes.
If you are considering a reverse mortgage as a foreclosure avoidance strategy, be sure to talk with an attorney, financial advisor, housing counselor or other third-party advisor independent of the lender before proceeding. A reverse mortgage can be a useful financial product, but you want to know all the ins and outs, as well reviewing other possible options, before you commit to one.
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