Pros and Cons of Reverse Mortgages

One of the fastest growing products in the home finance industry allows borrowers to transform their home equity into cash, use it to finance their retirement and pay it back when they move out of their home. The product is called a reverse mortgage but you must be at least 62 years old to qualify.

The loan money can be dispersed in several ways including monthly payments, an equity line of credit or a one-time payout. The amount available to borrow depends on the borrower's age, the value of the home, interest rates and loan fees.

Reverse mortgages originated in the 1960s but the public has been hesitant to use the credit source. The reverse mortgage market is a fraction of the mortgage industry, comprising only about seven-tenths of 1 percent of the market as a whole.

Today, their popularity is steadily on the rise and although many borrowers praise them, not everyone agrees they are a good idea. Converting equity into cash can help boost the financial bottom line when earning potential is limited. They can be a valuable retirement tool but homeowners need to understand them and use them properly.

Reverse mortgages are very profitable for lenders. Upfront costs are paid to the lender out of the home's equity at loan closing. Lenders also make money through interest, origination fess and points. The interest rates depend on the market but the closing costs are significantly higher than with conventional mortgages.

An additional cost to reverse mortgages is the burden of mortgage insurance. Mortgage insurance is usually required for regular mortgages where a borrower's down payment is less than a certain percent of the purchase. It protects the lender in the case of a default.

With a reverse mortgage, lenders depend on the property's value at the loan's end to be reimbursed. It also covers the lender if the reverse mortgage is held over a long period and accrued interest exceeds the value of the home.