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It is always a good idea before entering into any financial arrangement to understand what benefit the person on the other side of the deal is getting to fully understand whether the deal is equitable to both parties.

So today I'm trying to understand exactly what the upside of offering reverse mortgages is to the lender. It seems to me that if they are just looking for appreciation of value in the property they would just go buy real estate instead of doing this type of exotic loan. Is this just a form annuity where you pay at the end instead of at the start, where they are hoping you die quickly after taking it out? Is it all about the up-front loan fees to initiate them? Maybe something else?

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I'm not an expert on reverse mortgages but from my understanding the closing costs are much higher than traditional mortgages and the LTV is generally pretty low. So the bank makes money by not loaning out all that much compared to the value of the property and by charging high fees on the front end.

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Banks don't want to manage property. They despise the fact that they have all of these foreclosures that they can't sell. They just want to loan you the money at X% and collect the fees and interest.

The value of a reverse mortgage to the lender is that it's a collateralized loan against a property. When the owner exits the property, it's attached to the property and must be paid back before the property is sold. They carefully consider the age of the recipient, equity in the property, etc. when they decide how much to pay the owner so that the chances of the loan going underwater are minimized.

  • But given that most reverse mortgage loans are given to the elderly, doesn't the bank wind up with the collateral (house) more often than they get repaid in cash? Or do they just rely on the executor of the estate liquidating the assets and collect on their lien? – JohnFx Dec 25 '10 at 21:20
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    Usually the latter. See the answer to "When do I pay back my loan?" here: reversemortgage.org/Default.aspx?tabid=230 – mbhunter Dec 25 '10 at 21:33
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In the United States, most reverse mortgages:

  • Have much higher interest rates than regular mortgages.
  • Are variable rate loans, so the lender has little interest rate risk.
  • Have lower loan-to-value ratios than regular mortgages.
  • Have government guarantees, so the lender has limited capital risk.
  • Force the owners to sell (or pay off the mortgage another way) once the owners are no longer able to live in the home.
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They just let you borrow a little more every months. When the owner dies/sells they get all their money + % back.

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The lender makes money on the interest just like any other home loan. The HECM reverse mortgage is basically a home loan, but it’s designed to give seniors access their homes equity without taking on a mortgage payment or giving up ownership of the home. Their obligation is to continue paying their property taxes, homeowners insurance, HOA dues, etc. As long as they do that, no payments are required. They leave the home to their heirs and the heirs can inherit any equity remaining in the home.

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