Reverse Amortization Mortgages
Real Estate Financing Alternative: The Reverse Am Mortgage
With the Baby Boom in full swing, everyone is looking for a way to sell to this aging customer base. Mortgage companies were posed with a problem: Baby Boomers were paying off their loans. They needed a way to get Baby Boomers back into the game. Enter the Reverse Amortization Mortgage.
What is a Monthly Reverse Amortization Mortgage?
Reverse Amortization Mortgages work with the equity a homeowner already has. Essentially, this mortgage pays the homeowner a set amount of money for life based on the amount of equity they have. It’s very much like an annuity you might set up with a life insurance company. In that transaction you would pay the company $30,000, then they would give you $2,000 a year for 20 years. Instead of paying the $30,000 upfront, with a reverse amortization mortgage you refinance your house and pay it from the equity you have in your home.
These loans will pay you for life and add any interest payments on the debt to your home. The issue with these types of loans is that the borrower loses out on the ability to leverage additional appreciation in their home. In hot markets, this could mean thousands of dollars the owner cannot touch, while in cooler markets this may not be significant.
Important Considerations for Reverse Amortization Mortgages
The most important thing to understand is the interest rate you get for this transaction. Essentially, you want to be getting a higher rate for your money than you could get by refinancing and investing the money in a low risk investment. Here is a quick example. If a homeowner has $100,000 of equity in their home, they can refinance and take that money out. Depending on what year they are in their loan, they might be able to maintain the same payments. Additionally, they would be paying more interest and getting a higher tax deduction vs. paying more equity and getting no deduction. On top of that, a homeowner can invest the $100,000 in a yearly certificate of deposit (cd) yielding 5%, or $5,000 per year ($417 a month). The tax savings would probably be canceled out by the taxes paid on the 5% cd.
Given this analysis, you should be able to net at least $5,000 per year if your monthly payments stay the same. If your reverse amortization mortgage cannot provide this, then it would be better to refinance and invest the money yourself. Keep in mind; these products work best for people who are retired or retiring. It provides a fixed amount of additional income for long period of time (think monthly pension check or social security check).
For the younger folks out their, consider investing in real estate as a great alternative. Most investments net monthly income and provide a tax advantage. Starting young can help you create these annuity like cash flows yielding far more cash flow than any reverse amortization mortgage can offer.
