Reverse mortgages are very different from normal mortgages or loans. As the homeowner is “lending” the reverse mortgage provider an amount equal to the equity in the home, the homeowner pays no taxes on the money. When a borrower closes on a reverse mortgage, there are fees due at the signing and mortgage insurance is usually required as well.

Interest is also paid on the reverse mortgage to the homeowner, and the amount of interest is dependent on whether the reverse mortgage is a fixed rate or adjustable rate. The fixed rate reverse mortgage is new, and only available from some lenders. The drawback of the fixed rate reverse mortgage is that the cash proceeds are reduced in comparison to the standard adjustable rate type, which is similar to when a borrower makes payments on a regular mortgage. Prior to 2007, only the adjustable rate type was offered so that the borrower could maximize profits.

Once the reverse mortgage is settled, the homeowner is fully responsible for property taxes and mortgage insurance. The housing and urban development department (HUD) through the federal housing authority (FHA) backs all reverse mortgages; however, the homeowner must maintain independent mortgage insurance. If the homeowner were to fail to maintain the property taxes or the mortgage insurance, he or she may be found in default of the reverse mortgage. This is an important consideration to take into account when considering a reverse mortgage, as even one missed payment could mean the entire balance could become due. Always make sure that as a borrower you understand the intricacies of the reverse mortgage before signing the papers to take one.

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