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Reverse Mortages Help Seniors Keep Their home Or Purchase A New Home

Feb 4, 2008
For many seniors, home equity is roughly 30-40 percent of their net worth. They are house poor often times and don't have the available funds to make repairs. If you and your spouse are both at least 62 years of age and have significant equity in your home, a reverse mortgage can turn that equity into tax-free cash without forcing you to move or make a monthly payment. YOU DON'T NEED A JOB AND YOU DON'T NEED CREDIT! Age and equity are the only qualifying factors.

A reverse mortgage can be a worthwhile financial tool if used correctly. At the same time, you could make some serious mistakes with your financial future. For example, you don't want to take your equity and run down to the casino.

A reverse mortgage gets its name because of the way it works. Instead of the borrower making payments to the lender, the lender releases equity to the borrower in a number of forms:

A lump sum cash payment;

A monthly cash payment;

A line of credit

Some combination of the above. When the owner dies or moves away, the house can be sold, the loan paid off and any leftover equity value can go to the living owner or the designated heirs. Heirs don't have to sell the house. They can either pay off the reverse mortgage with their own funds or refinance the outstanding loan balance within six months with the option of two 90-day extensions that must be applied for. Unfortunately, heirs often discourage people from getting a reverse mortgage because they are afraid of losing their inheritance.

There are three basic types of reverse mortgages:

Single-purpose reverse mortgages, which are offered by some state and local government agencies and nonprofit organizations;

Home Equity Conversion Mortgages (HECMs) are federally insured reversed mortgages backed by the U. S. Department of Housing and Urban Development (HUD);

Proprietary reverse mortgages are private loans that cover home values usually over $600,000. Some loans are conventional loans, some are proprietary loans held by certain lenders and some are insured by FHA. The size of a reverse mortgage is determined by the borrower's age, the interest rate and the home's value. The older a borrower, the more they can borrow, but the amounts are capped by the maximum FHA loan limit for each city and county. The amounts vary from $200,160 in rural areas to $362,790 in many major metropolitan areas. In Alaska, Guam, Hawaii and the U.S. Virgin Islands, the FHA mortgage limits can be adjusted up to 150 percent of the ceiling based on the area. If the FHA modernization Act is passed, it is possible that the FHA loan limit will be raised. This would be great, since it seems that FHA is the mortgage loan that generally gives more equity to the senior.

Reverse mortgages have traditionally been chosen by older Americans who can't cover everyday living expenses or who otherwise need cash for such things as long-term care premiums, home health care services, home improvements or to pay off their current mortgage or credit cards greater than their income can support. More recently, though, they've become popular with individuals who see them as a better alternative to home equity lines. Some use the proceeds to supplement monthly income, buy a car, fund travel and second homes. Evaluate with the help of a financial adviser if reverse mortgage funds can be used to restructure estate taxes.

You will have to consult with a financial planner before you're granted this loan - that's one of the requirements. This step can be completed within the first few days of the process. The basic loan closing now takes place in about 30-40 days from the date of application. Generally the only out-of-pocket cost is an appraisal fee ranging from $300- $500. There is required counseling to make sure that you are making the right decision for you.

Here are other things to consider-some of these are risks:

Cost: Reverse mortgages are generally more expensive than traditional mortgages in terms of origination fees, closing costs and other charges. The basic FHA-backed HECM loan finances these fees into the initial loan balance, and they can run between $12,000 and $18,000. The loans are based on anticipated home value appreciation of four percent a year, so if the housing market is healthy, those costs are generally recovered in a short period of time. But if the housing market sours, it will definitely take longer to recoup those fees.

You'll need to make sure you're not endangering your federal retirement benefits: The basic FHA HECM is designed as tax-free income to the senior receiving their Social Security income. However, if your total liquid assets exceed allowable limits under federal guidelines, you might endanger your benefits. This is another critical reason to work with a financial planner on this decision.

Rates: Reverse mortgages have rates that are typically higher than those charged on conventional mortgages. Interest is charged on the outstanding balance and added to the amount you owe each month. Again, check the total annual loan cost.

Your mortgage can be called due and payable: The homeowner or estate always retains title to the home, but if you fail to pay your property taxes, adequately maintain your home, pay your insurance premiums, or change your primary residence, the lender can declare the mortgage due or reduce the amount of monthly cash advances to pay those overdue amounts.

Did you know that you can actually use a reverse mortage to buy a house? How do you do it? Let's take an example: maybe you sell you are a senior that sells their home and nets 300K. Next they can go buy a new home for about 500K, by putting down 300K, and financing the other 200K with a reverse mortgage. Maybe a senior would like to move from their older house of many years to a new condo or loft. This would be a great way to do it.

Talk to your kids as their ignorance of this product may cause them to give you bad advice. If your house is your major asset, getting involved in a reverse mortgage may not leave much to the next generation - if it appreciates, there may be some difference that the kids can have. That's why that in addition to discussing a reverse mortgage with a financial adviser, seniors need to talk with their family.
About the Author
Minnesota Mortgage Broker-Venture Development 952-285-4319 MN mortgage broker at my website at http://www.ventureloanapp.com John Mazzara sells Minnesota real estate in the Twin Cities(Minneapolis/St Paul), MN with RE/MAX 952-887-1290 MN real estate at my website at http://www.selling.mn We offer mortgage loans programs for First time buyers, investment property, refinancing & consolidation of debt
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