Finance
& Consumer Resources
Into Reverse with Caution: Details about Reverse Mortgages
In the past, you
handed over a monthly payment to your mortgage lender. Now there's a mortgage
product, aptly named, that reverses the payment process. In a reverse mortgage,
the lender pays you an amount of money that depends on your age, your home's
value, and the loan's interest rate. To qualify for a reverse mortgage, you
must be at least 62 years old, have equity in your home, and your home must be
your principal residence. If more than one person owns the home, the youngest
owner must be at least 62.
Under this plan,
you make no monthly loan payments as long as you continue to live in your home.
Ultimately, the loan—including the amount you borrowed, plus interest and any
loan fees you rolled into the loan—will be paid off when you or your heirs sell
your house.
Who could benefit?
Borrowers perhaps
best suited to a reverse mortgage are those who are seeking financial security.
They have plenty of money in their house, but they can't afford a home equity
loan because they'd have to make monthly payments. They're on a fixed income.
Being house-rich and cash-poor, these borrowers often face difficulties in
meeting ordinary living expenses, medical bills, home repair costs, and
property taxes. Selling their home seems the only way to make ends meet. A
reverse mortgage offers another option.
However, there
are tradeoffs and pitfalls. Opting for a reverse mortgage is a complex, often
difficult decision.
Things to Consider
Your house may be
the biggest asset you have to pass on to your heirs. But in a reverse mortgage,
the payments you receive come from your home's equity. Your heirs will get less
of that asset, based on how much you end up borrowing against your home equity.
Only you can decide how important this issue is.
Keep in mind,
too, that reverse mortgages come with sizable fees that may be as much as 5% to
6% of the home's value. You can roll these fees into the loan. Still, that
increases the amount you'll borrow and adds to the amount of interest you'll
pay. Because of the high fees, reverse mortgages aren't a good option if you
think you'll be selling your home in the next couple of years, advises Bronwyn
Belling, reverse mortgage specialist with AARP, Washington, D.C. "You want
to be sure you're going to stay in the house," she says, "so you can
amortize those fees over a longer period of time. Then the effective cost to
you is less.” “Also," Belling adds, "it’s better to consider this
type of loan when you're older, rather than younger." You can borrow a
larger percentage of your home's value based on your age, or the age of the
youngest borrower among the home's owners.
Still other
factors affect how well this loan will work for you. Typically, reverse
mortgages are adjustable-rate loans, with a lifetime cap. Interest rates can
climb. Your home's value can change, as can your health and your ability to
continue living in your home. All of these, Belling points out,
"ultimately drive what the real costs of a reverse mortgage are to you in
the end." You'll also need to find out whether
receiving this money will affect your Medicaid or Supplemental Security Income
benefits.
Much to learn
Which type of
reverse mortgage is right for you? In the U.S., the Home Equity Conversion
Mortgage (HECM), which is federally insured, is the most common. More than 95%
of reverse mortgages are HECMs, according to Belling. Another type is Fannie
Mae's Home Keeper®.
Other key
decisions include: Do you want your money in a lump sum, as monthly payments,
as a credit line to draw on as needed, or some combination of these?
All U.S.
prospective borrowers who wish to apply for a HECM must talk to an independent,
objective housing counselor who works for an agency (some charge a fee)
approved by the U.S. Department of Housing and Urban Development (HUD).
Belling
concludes, "For some people, a reverse mortgage is not a good idea. For
others, it's a godsend."
—By Dianne
Molvig
Home & Family Finance Resource Center
http://hffo.cuna.org/331/article/930/html
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