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The option ARM mortgage has many names, including “pay-option mortgage”, “negative amortization loan”, “pick-a-payment”, or “deferred-interest loan”, to name a few. Similar to the reverse mortgage, it allows a homeowner to pull out a lump sum of equity, while only taking on a relatively small mortgage payment. A few differences are that the homeowner can be of any age, but the money must be taken as a lump sum (no credit lines). Although the interest rate is generally between 6% and 12%, the borrower only makes monthly payments for between 2% and 5% annually of the loan balance. This gets paid monthly (take 2% to 5% and divide by 12). For example, if the payment is 5% and the interest rate is 8% (a common scenario), then the interest that is not being paid is 3%. (8% minus 5%). Similar to a reverse mortgage, the lender allows that 3% of unpaid interest to be repaid at a later date by adding it to the principal balance of the loan. Thus, the loan balance grows over time, even though payments are being made. But there is a limit on how much the loan balance is allowed to grow. Depending upon the lender, once it reaches around 110% to 115% of the original loan balance, a full mortgage payment must be made.

Part 4 will follow in a couple days.

If you have done any research or read any news articles, you've read that reverse mortgages aren't for everyone. And I agree with that. But for many, they are the best thing since sliced bread. What makes the difference?

Let's start with talking about for whom reverse mortgage may not be the best choice. The most obvious group is those who do not qualify for any of the programs. The basic requirements, such as both spouses being too young or non-home ownership, can be evaluated quickly. But the existence of a current mortgage, unknown home value, and even ownership in a stock co-operative can go either way.

There are several scenarios where a reverse mortgage might not be the best choice. A single homeowner who is very sick, plans to move into a nursing home soon, and can easily qualify for a large home equity line of credit. He may be better off with that mortgage if it will give him more than enough money to cover expenses for the remainder of his time at home.

A couple who has conservative investments that are securely providing them MORE than enough money to support their desired lifestyle for the rest of their lives may not need a reverse mortgage. It's probably unnecessary for a single person with a good pension, excellent health, a long term care insurance policy and who has no desire or need for additional funds.

Everyone's situation is unique. If you think that you or someone you know may qualify for a reverse mortgage and are curious about its potential benefits, I encourage you to investigate it. It may or may not be for you or the person you know. But get your questions answered and find the information that you need in order to make the best decision for your situation. As there is unfortunately a lot of misinformation out there, whatever decision you make, be sure that it is well informed and based on the facts. Much of that information can be found in this blog. A helpful reverse mortgage FAQ may also help you make the right decision.

Reverse Mortgage Alternatives: Part 6

This post is a continuation of the answer to the question: “Why not do a traditional refinance and pull cash out?”

Another risk that is coming home to roost these days for homeowners did a Cash-Out Refinance is that the housing market takes a dive and you end up owing more than your home is worth. Certainly, that could cause the bank to "call" your traditional mortgage. And what if you run out of money and are forced to sell the home, but have no equity? How do you sell the home then? It’s very tough to do – so much so that most people in that situation just give their home back to the bank and/or declare bankruptcy.

What hurts even worse, is that traditional refinance mortgages are "full recourse" loans, which means that you could end up owing the bank MORE money after they have taken away your home. Not so with a reverse mortgage - it is "non-recourse", which means that you can never owe more than your home is worth. How is that possible? Stay tuned to this blog for a discussion of FHA insurance for reverse mortgages.

The Cash-Out Refinance and the HELOC is designed for younger, working people - not for people over 62 who are on a fixed income. At best, these traditional mortgages are a short-term solution for a senior with a short-term problem: they just need a little cash and KNOW without a doubt that they won't even get close to running out of money before they sell their home. Casting doubt on the latter case, is the possibility that the senior will have unexpected expenses such as uninsured medical bills, in-home care, home repairs, etc. Such bills can be very expensive and quickly deplete the money from a HELOC or CO-REFI.

I hope you have enjoyed reading about the common alternatives to the reverse mortgage as much as I have enjoyed writing it. Check back on this blog frequently, as I plan to write every day. Thanks!

We’re talking about the answer to: “Why not do a traditional refinance and pull cash out?” For continuity, first see yesterday’s post on the same subject.

Since you make no payments on a reverse mortgage, you can't lose your home for missing a payment. Now that provides you with a bit more security than a traditional loan that requires monthly mortgage payments, don't you think?

Adding to that security is the fact that with the reverse mortgage, you will never be required to re-qualify for the loan. Now what does that mean? Here's a little-known fact: since traditional mortgages require that you qualify based on income, assets and credit, the bank reserves the right to periodically "check up" on you to make sure that you still qualify for the loan. If after a couple years, you have used up some of the money from your loan, or spent down a significant part of your other savings, the bank may close the loan and require immediate and full repayment. This is "calling the loan". And we all know what happens if you cannot afford to repay a mortgage to the bank. There also have been recent reports in the media of lenders taking away the homeowner’s HELOC without warning due to declining home values and equity.

Tomorrow will discuss another risk of the traditional mortgage as an alternative to the reverse mortgage.