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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76106  
Subject: Reverse Mortgage Advantages to Seniors Date: 2/17/2012 2:49 PM
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I've been asked about this more & more frequently recently... and I think the public would benefit by understanding the TRUE cutting edge advantages of reverse mortgages (knowledge is power!)

Most of you probably already know the basics about reverse mortgages, and the truths that kill the fallacies (the bank does not become the owner, nobody is "losing equity," etc. etc.)

From a STRATEGIC FINANCIAL perspective... reverse's give us & our clients the potential access to *EXTREMELY LOW* costs of money. Much lower than alternatives, and at no risk of foreclosure.

Here is how & why;

A reverse mortgage can be made on approximately 70-75% of the current appraised value of a home. The current fixed rates on a reverse are in the mid-4%s to low 5%s (but the *REAL* costs of a fixed rate reverse DROPS after 7-8 years... I'll show how & why.)

A reverse mortgage line of credit has a variable interest rate, and can be currently in the 2%s. This appears attractive on its face value immediately, *and* a senior may even feel that we are unlikely to see rising interest rates to create much risk... and as you see the explanation below, the *REAL* risks and costs to the senior *DROP* over time.

Here is why;
The reverse lender can only *COLLECT* their interest from the eventual sale of the home. Further, they can *EXCLUSIVELY* collect from the actual NET sale proceeds, and not a dime more. If they accrued more interest charges during the borrower's lifetime than the homesale actually can pay for, those additional charges are not enforceable against the estate, and must be *ignored* as uncollectable by the lender.

This means that the lender is relying on the real estate appreciating in resale value faster than their pace of interest charges. If the interest charges accrue faster and higher than the remaining equity of the home, the interest is uncollectable. Uncollectable interest equals INTEREST FREE LENDING on that amount of money, for that amount of time.

EXAMPLE;
$100,000 home.
$75,000 reverse taken out @ 5%

After 5 years the accrued interest is $25,507...
If the property has zero appreciation, the $507 is uncollectible, and the loan is *FREE* from that point forward.

If the near future years have a 1% annual *DROP* in equity value (not incredibly unrealistic, going forward,) then the accrued interest overcomes the actual equity remaining at end of year 3... FREE MONEY from year 4 onwards.

If the near future years have a 1% annual *APPRECIATION* in equity value (also not incredibly unrealistic, going forward,) then the accrued interest overcomes the actual equity remaining at middle of year 7... FREE MONEY from year 8 onwards.

If the near future years have a 2% annual *APPRECIATION* in equity value (I consider this unlikely and wishful going forward,) then the accrued interest overcomes the actual equity remaining at beginning of year 9... FREE MONEY from year 10 onwards.

The actual final cost of money from a reverse mortgage can only be determined by the eventual measure of appreciation from today forward until the senior passes away or moves out & the heirs re-sell the home... but in no realistic case will the final actual interest collected from the proceeds come anywhere near the initial fixed rates of 4.5% to 5%...

If a senior uses a reverse line of credit, and rates stay low, they may never actually consume all of their real home equity... or, if they extend complete consumption of the equity out many years into the future (due to future appreciation,) they're real interest costs remain extremely low.

ALL THE WHILE this frees up cashflow... which is exactly what many folks need.

Cheers,
Dave Donhoff
Leverage Planner
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