Like Betty and John, if youre considering a reverse mortgage its important to do some research prior to making a decision. You not only need to understand the basic principles of this kind of mortgage but you also need to look at all the advantages and disadvantages of a reverse mortgage.

Essentially a reverse mortgage is a loan that permits homeowners 62 years of age and older to borrow against the equity in their homes without having to sell it. Further, you dont have to give up the title or take on a new monthly mortgage payment.

A reverse mortgage loan is tax-free and needs only to be repaid when the borrower (or in the case of Betty and John, when the surviving spouse) dies or sells the home. At which time, the reverse mortgage loan must be repaid in full, including all interest and other charges.

When examining the advantages and disadvantages of a reverse mortgage its also important to consider both the process and the related costs of obtaining a reverse mortgage. Unlike a conventional mortgage, with a reverse mortgage, the homeowner (the potential borrower) must meet with a reverse mortgage counselor. References for counselors can be obtained from banks offering reverse mortgages or the U.S. Department of Housing and Urban Development (HUD).

The purpose of these meetings which may take place in person or on the telephone is for the homeowner to learn about reverse mortgages and discuss alternative options. It also helps you decide which kind of reverse mortgage may be best. As well as exploring the advantages and disadvantages of a reverse mortgage, its wise that the potential borrower, also compare costs between various lenders and request a Total Annual Loan Cost estimate for each.

Further to discussing the advantages and disadvantages of a reverse mortgage with a counselor, you also need to understand that there are certain costs involved in the reverse mortgage process. Costs may include application fees, closing costs, insurance, appraisal fees, credit report fees, and quite possibly a monthly service fee. Remember too that since a reverse mortgage allows you to continue living in your home, youre still responsible for property taxes, insurance and repairs. If these payments are not maintained, the loan could become due in full.

A reverse mortgage may also affect eligibility for federal or state assistance as well as Medicaid. That said, any reverse mortgage money that is received is tax-free and does not affect Social Security or Medicare benefits.

The condition of your home is also a large part of the approval process. It must be structurally sound and in good repair. If its determined that home repairs need to be done, the costs can also be financed through the reverse mortgage loan.

The total amount a homeowner can borrow all depends on the kind of reverse mortgage selected, how much equity is in the home, the loan’s interest rate and most importantly, the age of the borrower. Typically the older a person is, the more they can expect to receive.

A borrower can receive reverse mortgage payments in one of the following ways: in a lump-sum payment; fixed monthly payments; a line of credit or a combination of any of the above. Most homeowners go for the line of credit option which allows them to draw on the loan whenever money is required.

Paul Jesse is a retired government employee, small business owner and the author of many articles on finance and internet marketing. Visit his website at: http://www.sheamarketing.com/financial

How to Avoid Paying Mortgage Insurance

In today’s world, a borrower should not be paying mortgage insurance (PMI) on their home mortgage with a few exceptions such as an FHA loan. Mortgage Insurance is a thing of the past.

Lets first explain what mortgage insurance is. A lender requires a borrower to pay mortgage insurance if the loan amount is greater than 80% of the value of the home on a single loan. The reason this is the case is the loan is not sellable in the secondary financial markets as it does not meet certain guidelines. As a result, the lender makes you pay for their insurance in the event you default on the loan. The insurance will cover the lender for the balance of the loan plus expenses. The problem for borrowers is that mortgage insurance is expensive..sometimes $100 or more per month.

Fortunately in todays mortgage world, we have legal common ways to avoid paying mortgage insurance in most cases. Lets say you are a first time home buyer and only have 5% to put down on a condo or house. A mortgage professional should do two loans for you. A First Mortgage Loan in the amount of 80% of the value of your home and then a Second Mortgage for the remaining 15% of the loan balance. This would be called an 80/15/5 (80% 1st Loan, 15% 2nd Loan, 5% Down)

The question you ask is why? Well, by doing two loans your payment every month will be cheaper so take a look at this example to see why.

For example, let’s say you had 10% to put down, we would do a 1st loan at 80% and then a 2nd loan at 10%. The 2nd loan will always carry a higher interest rate, but when you break the numbers down, it’s cheaper from a payment point of view to have the two loans.

Here is a $180,000 loan at 6% fixed rate for 30 years.

Option 1 with PMI

Single Loan 90%

P&I $1,079

PMI $ 85

Payment $1,164

Option 2 with 2nd note and no PMI
Two Loans 80% / 10%
P&I 1st Loan $971
P&I 2nd Loan $126
Payment $1,097

In this example, the borrower will save $67 per month by not paying Mortgage Insurance (PMI)

Depending on the type of loan, the Second Mortgage often times can have an interest only option where your payment would even be less on a monthly basis. The downside to this solution is your not paying down the principle on your 2nd mortgage, however if youre a first time home buyer with limited cash flow, this would be a viable solution for you. A mortgage professional should lay out the various options for you in writing so you can make an educated decision as to the best solution for you.

If your currently in a loan with mortgage insurance, then you need to speak with a mortgage professional immediately so your not wasting money on a monthly basis. Your mortgage professional should provide an analysis to determine if doing the transaction is feasible for you with consideration of some closing costs.

(Per the FHA, all FHA loans require mortgage insurnace if the loan is 80% or greater. the mortage insurance will remain in effect for a period of 5 years. If after the 5 years and your loan balance has fallen below 78% of the value of your home, you will be eligable to stop paying mortgage insurance.

Douglas Boncosky is a Mortgage Professional and Author. Doug has published a number of articles, guides and books including the 50 page book, “First Time Buyers Guide to a Stress Free Home Buying Process” Doug is Personal Mortgage Advisor for Smart Mortgage Access, a Schuamburg, IL based mortgage broker. Doug is also Founder & Executive Director of The Advisors Club, a organization exclusively for Chicago area Real Estate Professionals. For more information, please contact Doug at http://www.dougboncosky.com