What Is A Reverse Mortgage

By David Beart

Rumors are that a reverse mortgage is only for people of a certain age - usually seniors. True or false?

Reverse Mortgage: American Style

For the most part, it’s true, particularly if you consider how they came about. In the United States, reverse mortgages have been around for some 20 years and they were created when the American Associated of Retired Persons lobbied the US Congress to come up with a financial product that would allow seniors to stay in their homes as long as possible. It took awhile for the product to catch the attention of the public. According to Cathy Jett who wrote an article for a Virginia newspaper, reverse mortgages have been gaining popularity only in the last three years.

At its most basic level, a reserve mortgage is a loan that a homeowner takes out on his house. American laws dictate that the homeowner must be 62 years and older, own his house and live there for majority of the time. When they apply for a reverse mortgage, the amount they receive will depend on their age, the interest rates in effect at the time of their application and the value of their house. The applicant has the choice of receiving the loan in one lump sum, in monthly instalments, in the form of a line of credit or as a combination of the first three options.

Unlike a regular or traditional mortgage, a reverse mortgage does not require the applicant to make monthly payments. The loan however must be paid in full once the applicant sells the house or no longer uses it as a principal residence. This makes owning your house longer a feasible alternative – you never run the risk of losing your home provided you pay the appropriate property taxes and insurance. A reverse mortgage resembles a traditional or regular mortgage only insofar as closing costs are concerned, including any fees that apply for servicing the loan and other such upfront costs.

Reverse Mortgage: Canadian Style

The principles that lie at the core of an American and Canadian reverse mortgage are the same. Like the US, this kind of financial product appeals to older Canadians. In cases where Canadian seniors get divorced – as an example - and there isn’t much by way of assets and hard cash, the house remains the most important asset of Canadians. During a divorce, the husband may get the money and the wife the house. Those who end up with the house are therefore house-rich but cash-poor.

For Canadian seniors who own a house that is fully paid or almost paid for, their piece of real estate can be an excellent source of additional income. They may want to travel, renovate or help a son or daughter still in university.

There was this one woman who applied for a reverse mortgage because she needed money. The bank gave her $50,000; she does not have to repay that amount for a certain number of years and for as long as she lives in the house.

A reverse mortgage therefore is ideal for seniors who have a house but have a low income, and need financial resources to continue living. Reports indicate that on the average, houses constitute 80% of Canadian seniors’ assets. If their income or pension is low, they don’t have the necessary cash required to meet their day-to-day. So with a reverse mortgage, seniors can avail of a lump sum amount with no obligation to pay it back for a certain number of years and as long as they remain in their homes.

A writer, P.J. Wade, says it’s a great way to have your home and money as well. A reverse mortgage enables an applicant to tap into the equity of his home for cash.

Some experts recommend not taking a reverse mortgage until you’re in your 60s. Applying for a reverse mortgage in your 50s means that you’re still young by the time the equity in your house is gone. This is the downside associated with reverse mortgages. The equity disappears after a certain number of years and the life of the loan ends, with the principal still outstanding and huge interests to boot!

There’s a match to this downside. When you have a reverse mortgage, and you’re unable to pay your debt, your house cannot be foreclosed even if the amount exceeds the value of your house.

Reverse Mortgage: Think of Alternatives

Before you apply for a reverse mortgage, gather at least two or three opinions. Your banker may offer alternatives. Many lenders agree that a reverse mortgage should only be regarded as a last resort. One alternative is a home equity line of credit, where you could have a source of cash by using your house as security. Another alternative is, if your children have left home and you have a spare bedroom or you don’t use your basement much, you may want to consider renting it out for added income.

Downsizing is another option. It used to be that your house was comfortable because the kids were growing up and had friends over, and you and your husband entertained a lot. If you don’t need your sprawling cottage anymore, and you can’t keep up with the maintenance, wouldn’t it be wiser to sell it in exchange for a smaller home?

To Reverse or Not to Reverse?

If you’re at a loss about choosing between a reverse mortgage and a cheaper alternative like a line of credit, test your feelings with these questions:

• Can you honestly say that you love your house and can’t bear to move to another place? Are you perfectly willing to do what needs to be done to keep it in tip top shape?

• Will you be able to sleep at night knowing that the money you acquired against your house via a reverse mortgage will eventually have to be paid in full and before accumulating debt eats up your equity?

• Are you in a position to pay the property taxes and insurance premiums as well as cough up amounts for repairs and improvements to your house? Remember that failure to pay taxes can oblige the lender to demand full repayment of the mortgage.

• Will you have sufficient resources to meet interest and principal payments on the reverse mortgage once they fall due?

• Finally, speak to some of your friends who have reverse mortgages. Find out what their experience has been. Are they glad they did it, or wished now they hadn’t?

Interrogate your lender if you must, no matter how repetitive your questions are. Your lender might just utter something that will raise your antennas higher or convince you that reverse mortgages are the way to go!

David Beart is the owner of http://www.professorshouse.com . Our site covers mortgages household finances, family forums recipes and other household issues.

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The Mortgage Crisis of 2007 - A Love Story

By Brandon Cornett


In the future, when people cast a financial and historical eye back to 2007, one thing will clearly stand out, and that is the mortgage "meltdown" that came to a head during that year.
In truth, the full effects of this mortgage and lending crisis are yet to been known, even as I write this article in January of 2008. People are, however, beginning to toss the dreaded 'R' word around ... Recession. And why shouldn't they? Abroad, we are spending money we don't have to fight the seemingly endless "war" in Iraq. While at home we are experiencing the so-called mortgage meltdown -- the worst in recorded financial history. It sure smells like a potential recession.


But this article isn't about recession. It's about love.


You see, many people don't realize that the mortgage crisis of 2007 is really a love story. In fact, there are many different types of love overlapping here. It's just one big love-fest! Consider the following types of love that are present here:


We American consumers love to buy, even when it's not wise to do so.
American corporations love to profit from the consumers who love to buy.
Government officials love to be paid for the trouble of looking the other way.


Looking Back - A Love Story Unfolding


Through the mid 1990's and early 2000's, the number of subprime mortgage loans rose significantly. A subprime loan is basically a loan made to somebody who really shouldn't be taking on the loan. But the loan is made possible out of love. The lenders love to charge high interest on consumers with bad credit, and those consumers lRove to buy things (in spite of their bad credit).



Some mortgage lenders fell so deeply with this type of lending (and the profits it produced) that they began to focus on it exclusively as a business model. Thus they became known as subprime lenders, and they saw this as a chance to outmaneuver competitors by extending loans to borrowers that their competitors were turning away.


Economists, who love the truth and the data that supports it, began to warn against this practice. So some states began to pass restrictions against certain types of subprime lending.
Ah, but those state politicians also love lobbyist dollars. So they found themselves torn between two loves -- the love of doing the right thing, and the love of money funneled in from the mortgage industry itself. For example, consider the fact that Governor Arnold Schwarzenegger of California received well over a million dollars from associates of Ameriquest* (one of the largest subprime lending companies).


Incidentally, California is one of the states hit worst by the mortgage crisis. Lots of love in California!


So this is yet another example of a politician who loves to receive support from large corporations -- corporations that, in turn, love to shape our country's laws with some good old-fashioned greasing of skids. I loved Arnold in the original Conan movie, by the way, but I don't love him so much as a Governor.


The Love is Spreading All Around Us


The love of money, buying, selling and lobbying has created a mortgage crisis of truly epic proportions. And like any good financial crisis, it has spread to other areas. When consumer lending tightens, business credit and financing usually follows suit. Just listen to what a recent New York Times article had to say about it recently:
"Credit flowing to American companies is drying up at a pace not seen in decades, threatening the creation of jobs and the expansion of businesses, while intensifying worries that the economy may be headed for recession."


At the same time, we are seeing the dollar weaken against foreign currencies around the world. We should be alarmed by this! We should press for change! We should curtail spending! We should question the White House's maniacal love for overspending on fruitless ventures like the war in Iraq. We should ask the question, "How long until the United States goes broke?" But there is another type of love that lulls us into complacency...


Politicians at the highest level love to offer encouragement by playing down the true severity of our financial crisis. They love to soothe us the way one might soothe a child who is teething.
And we just keep swallowing it right up. Because love is blind.


* Sources: Federal Election Commission; National Institute on Money in Politics; Center for Public Integrity; state disclosure offices.


About the Loving AuthorBrandon Cornett is the editor of the Home Buying Institute, which has been teaching home buyers about real estate, mortgages, credit reports and related topics for over five years. Learn more by visiting http://www.homebuyinginstitute.com/
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