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Should Your Clients Consider a Reverse Mortgage?

Despite the public's negative perception of reverse mortgages, these vehicles can sometimes be practical as long as the clients understand them.

Helen Modly and Tommie Monez, 09/08/2011

Mention a reverse mortgage and people tend to get a sour look on their face. The high upfront costs, rapidly shrinking home equity, and early abuses are hard to deny. But sometimes the reverse mortgage is a practical solution to a client's cash flow problems, as long as they really understand what they are getting into.

The Basics
A reverse mortgage is a loan that allows homeowners, age 62 and older, to receive cash payments based on the equity in their home. These balloon-type loans are typically used to provide a lump sum or a series of cash payments to borrowers that want to remain in their home.

Types of Home Equity Conversion Mortgage (HECM) Loans
There are two basic types of HECM loans, the standard loan with hefty upfront premiums, and the saver loan with lower fees but higher interest and lower borrowing limits. There are fixed-rate and adjustable loans available for both the Standard and Saver loans. 

The HECM Standard Loan carries an insurance guarantee that the debt cannot exceed the value of the home and that the loan will not have to be repaid as long as the one of the borrowers occupies the home.

With the HECM Saver Loan, the upfront mortgage insurance premium, or MIP, is only .01%, but the borrowing limits are 10%-18% lower than the standard loan. The interest rates also are higher, and the origination fees tend to be higher. This loan also has the ongoing 1.25% MIP added to the interest rate. 

Types of Payout
The loan payout can be tailored to the client's situation and can be altered as needed for a small fee. The basic methods for receiving payment are:

Tenure--equal monthly payments as long as at least one of the borrowers is alive and occupies the property as a principal residence

Term--equal monthly payments for a fixed period of months as specified in the contract

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