Reverse Mortgages: How To Better Understand Them

Although the housing market is in a slow down, one area of the mortgage market that is hot, is in reverse mortgages. This gives older homeowners more options to tap the equity in their homes. Some changes have been made to this market and many large banks and mortgage lenders have launched reverse mortgage products with lower fees and larger payouts. Some lenders have lowered the minimum age requirement to 60 from 62, while other lenders are making loans on second homes and vacation rentals. Also "jumbo" reverse mortgages on houses valued at as much as $10 million are becoming more common.

With a reverse mortgage, the borrower (or homeowner) has payments made to them from the lender. The borrower keeps control of the property and does not have to pay back the money as long as he or she lives there. When the homeowner dies or moves out, the loan is typically paid off by selling the house, and any money left over goes to the homeowner or their estate.

Fees are typically steep - more than 5% of the home's value and most borrowing limits are capped based on where the property is. Fees are paid upfront or financed, while interest rates affect how much of your equity the lender ultimately takes. In the past, reverse mortgages have charged variable interest rates; now, fixed rates are available, however they may cost you more.

Taking out a reverse mortgage to travel or spoil grandchildren is very different from a few years ago, when seniors that were financially strapped took them out to pay medical bills and buy food.

Today, a half-dozen investment banks, including units of Lehman Brothers Holdings, Inc. and Bank of America have started buying reverse mortgages, with plans to eventually package and sell them. Just a week or two ago, Ginnie Mae, the federal agency charged with making real estate investment more attractive to institutional investors, announced that they are rolling out a standardized government bond issue backed by reverse mortgages. This is a key step in creating a secondary market that could help lower borrowers costs and increase the loan's availability.

The two primary questions a homeowner needs to ask when investigating reverse mortgages are:

1. What index does the loan use? Traditionally reverse mortgages have used the CMT index, which is based on Treasury bonds. There are some new products that now use the Libor index which should lower interest rates over the long run. But read your product carefully, whichever index is used, one product might add 0.65 percentage point; another might add 2.00.

2. What are the fees? Fees can typically run up to 7% on government backed loans. You may pay higher interest rates in exchange for lower fees.

Some homeowners are using the reverse mortgage product as a type of equity line, and with the recent housing slump, often values are less than what they were a few years ago. Either way there are a variety of options out there for homeowners with significant equity that want to tap the potential of their property.