Reverse-Mortgage-Truth.com

Since the inception of the reverse mortgage program by HUD, only an adjustable interest rate has been available – at least until last year. With recent news stories spreading fear about the danger of adjustable rate mortgages, many seniors have understandably been more than a little gun-shy of the reverse mortgage with an adjustable rate.

But just in this last year, a new fixed-rate reverse mortgage has been introduced. The rate is locked at the drawing of the final loan documents and remains fixed for the life of the loan. With rates as low as 5.5% this year, a fixed rate reverse mortgage sounds like an attractive option. But, as with most new things, it comes with a few caveats.

The fixed rate reverse mortgage requires that the senior homeowner take out the money that they qualify for as a lump sum. No credit line, term or tenure income payment is available. For those that have a large mortgage to payoff, or for those who have plans for the money, this disadvantage is the sleeves out of their vest. But for this reverse mortgage for seniors who owe little or nothing on their homes and just want a little additional monthly spending money, the lump sum requirement has some real tradeoffs.

If they are required to take out all of the money at once, then interest will begin accruing on the full loan amount from the first day. But with the adjustable rate reverse mortgage, they could get a monthly income check whose amount is added to the mortgage balance when the check is deposited. This would keep the balance of the reverse mortgage lower over the long run, allowing less interest to accrue and leaving the senior or their heirs more home equity down the road.

The fixed rate reverse mortgage may be a good idea for some seniors. For those who think that an adjustable rate will, over time, average out to be higher than the currently-available fixed rate, it may be a good choice. Those who choose the fixed rate reverse mortgage must also have a good use for the lump sum of cash that they will receive, so that they do not needlessly accrue interest on their loan.

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Let's admit it, "reverse mortgage" is a terrible name. Reverse? Who wants to go backward in life? Everyone wants to go forward! And "mortgage" is often a bad word to seniors who grew up during the Great Depression and who held mortgage-burning parties when they paid off their homes. If you had a mortgage, your goal was to pay it off as quickly as possible. Of course the goal of the reverse mortgage is to let it pay you.

The product truly suffers from a bad name. They should have called it the Home Income Plan, or Equity Unlock Program. Those names at least communicate something more positive than "reverse mortgage". But it's probably too late to change the name now that has become a main-stream product.

Ultimately, I believe that the reverse mortgage will shed its negative image and become a household term. Why? It's a great deal for many homeowners age 62 and above. Second, look at who promotes their use: consumer advocacy groups such as AARP and the National Council on Aging; government agencies such including the US Department of Housing and Urban Development (HUD), Federal Housing Authority (FHA) and the US Department of Real Estate. "Reverse mortgage" won't sound like a rip-off for much longer.

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To answer this question, you have to know the background. And if the reverse mortgage is not a rip off, then it certainly has some public perception issues to overcome. Some people who are familiar with the term seem to get some form of indigestion whenever they hear it. Why is that? Is there any good reason for the scowls or at least puzzled looks its mention sometimes produces?

You bet there is. The reverse mortgage began life in the 1970's as a last resort for destitute widows. And it was, in many cases, a bad deal. It often had the senior sharing a large percentage of their equity with the bank. Stories broke in the newspapers about seniors being ripped of by these schemes, while the bank made huge profits. Getting a reverse mortgage in those days was, in fact, like signing your home over to the bank.

Fortunately, all that has changed. I am aware of NO reverse mortgage programs in the US marketplace today that share equity or appreciation with the lender. More importantly, the Department of Housing and Urban Development (HUD) regulates reverse mortgages and designed the HECM. For most programs, they regulate the interest rates and fees, require third party counseling for the borrowers, and require lenders to be FHA-approved in order to offer them. These mandates, among other changes, have transformed the reverse mortgage from a rip-off into a fair deal.