Reverse Mortgage For Dummy - What is a reverse mortgage?

There is surprisingly little number of people who understand what reverse mortgages are, and even among those who do, there is a debate whether these instruments are actually beneficial to those who take them, or whether they are, in Warren Buffet’s terms, “financial weapons of mass destruction”.  This article will provide a few insights, and the point of departure will be to differentiate a reverse mortgage from the conventional type.

Nexus between conventional and reverse mortgages

A mortgage is commonly understood as an arrangement where a property owner “sells” his/her interest in his property on the premise that the property will revert to him upon performance of a defined duty. (Tamy Kraener)

Technically, it is a conveyance or assignment of land with a promise for re-conveyance or reassignment.  Therefore, under the mortgage, the lender (Mortgagee) becomes the owner of the land while the borrower (Mortgagor) retains the physical possession.

A reverse mortgage is a home equity loan advanced to senior citizens that allows them to convert their home equity into cash, while retaining ownership.  Home equity is basically the difference between the value of ones home and the loan outstanding to the mortgagee. (www.wikipedia.com)

The effect of a conventional mortgage is that repayment of the loan will mean the owners rise in degree of control and a corresponding fall in the debt owed to the lending institution.  For reverse mortgages, the reverse is true! How? Every time the borrower takes an additional sum, their debt will increase while the ownership of the house or home equity will reduce.

Unlike a conventional mortgage, in a reverse mortgage, a borrower does not make payments to the lender; instead, the lender will make payments to him.  No repayment is required for as long as the owner continues to live in the particular property and that they do not sell it.

Age and liquidity

Nelson Haynes , a banker, is the man credited with coming up with reverse mortgages in 1961.  He did this primarily with the senior citizens in mind.  There will always be a few of them who fail to fully plan for their retirements, or may as well have actually planned for it but had their plans ‘spoiled’.

So, unlike general wisdom which frowns upon the ability of the elder people to pay loans, reverse mortgages jump at the opportunity to lend.

However, this facility cannot be of service to every senior citizen as the conditions require one to show “asset stamina”.  It is also not a requirement under these schemes for one to prove to the lender that they earn a consistent salary.  The loan and the amount of loan advanced are greatly based on age.

Money advanced via reverse mortgages can be used for a variety of purposes including repair of the seniors’ home or for their general upkeep.
                                                     

Privity of contract

Reverse mortgages, unlike general contracts, take care of both spouses. Indeed, the borrowers spouse is considered a co-borrower and will have the same benefits accorded to the other, once any of them passes on. (Jennifer Stromsteen)

Since nothing is what it seems in the loan and security markets, acquainting oneself with some basic knowledge of these mortgage instruments has never sounded like a bad advice, and especially so now.

References

• http://books.google.co.ke – The Complete Guide to Reverse Mortgages.
• http://www.wikipedia.com/reverse mortgages.
• http://www.articlesbase.com – Reverse Mortgages and What They Are.